Diversify with Mark Khuri

Welcome. This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program you'll learn game changing strategies to outperform the market. James will teach you how to source, execute and capitalize on the best real estate opportunities in New York and around the world. Now here's your host.

Welcome to episode number 169 of the Insider's Edge to Real Estate Investing. This is your host, James Nelson. And wow, you know, it's been a while since I've done the math, but I was just at this great real estate conference hosted by one of my mentors, Blaine Strickland, who has written two books, Thrive and Adapt. If you haven't checked those out, definitely worth a read. And I was talking to some people at the conference. James, James can't believe that you've been doing this show now for so long and I guess I haven't done the math. But yes, the fact that we've been doing this show weekly, if you just take 52 weeks in the year, and I might have taken a week or two off in between, but we're now going at least three years strong and.

You know, hopefully what you all are.

Appreciating, what's helpful is the consistency. And I really do think that's also such a key to success. We've heard so many great stories on this podcast of investors who've just stuck with it. Whether the market's up, down, going diagonally, think consistency and continuing to show up. So for those of you who've been loyal listeners since the start and, or for those of you maybe this is your first show listening, really appreciate your attention, your interest and you are taking time now to really invest to help give yourself the insider's edge to real estate investing. That's what this show is all about, how to gain the advantage and outperform the market. So today's show, no exception, we've got a great guest, Mark Currie, who is going to be talking about the differences between actively and passively investing and what might be best for you. He is the co founder of SMK Capital Management, a boutique private equity real estate investment firm. Mark talks about the value of diversifying with best in class sponsors across multiple asset classes and geographies. So I know many of you are looking to go out there, invest as general partners, as sponsors, going to do direct deals, but a lot of you also may have interest in investing passively with other developers, operating sponsors. And so I think this will be very helpful for you to kind of learn about the different ways that you can get involved. And I think for many of you it is a personal choice on what type of time do you have to devote to this. And I think that's also something that Mark's going to talk about. Mark's career began in 2005 when he started in residential real estate in California and Florida and then in 2010 he co founded SMK Capital Management which focuses on recession resistant investment opportunities. Mark has experience analyzing thousands of investment opportunities and he shares the value of understanding the story behind the property to find where value could be added. His investment span from mobile home parks to self storage, ATM machines, triple net industrial among others. And so if you're going to invest passively, qualifying the sponsor is essential and Mark shares how best to go through that process. Or if you are a sponsor and thinking about what would your investors want to see from you, I think you're also going to get tremendous benefits. So as always you can find show notes on this@james nelson.com where you can also find Mark's information and his company's website@smkcapitalmanagementlc.com we're going to have a brief word from our sponsor and we'll get right into that interview with Mark Currie.

A Different Approach to Putting Our Clients First Avis and Young's Tri State Investment Sales Group sells multifamily office, retail, development and specialty sales throughout the New York metro area. As experienced thought leaders in their industry, our 35 member group is available to help you make informed investment decisions by advising you on your current holdings or identifying new opportunities in the marketplace. Our one unified team is built on an industry unique platform which promotes unparalleled collaboration and teamwork. We share core values of hard work, integrity and expertise. We put our clients first, providing tailor made strategies to achieve superior results. Please Visit us at aytristateinvestmentsales.com and follow us on Twitter, LinkedIn and Instagram amesnelsonnyc to learn more.

Welcome everybody. Today, thrilled to have with us Mark Curry who is co founder of SMK Capital Management from Bend, Oregon. Mark, welcome. Thank you so much for joining us today.

Thank you James for having me.

Wonderful. So really excited to hear about your story. I know our audience is going to get a ton of benefit. Now Mark, you've been doing this for quite some time. You've amassed this incredible portfolio which stretches pretty much across the country. And among other things, I know affordable housing has really been one of your Big focuses. So just for our listeners, why did you end up on affordable housing? And I'm guessing maybe there's something more to do than just the dollars and cents.

Sure. Well, I'll give a little backstory, James, how we got into the space. But I worked in corporate America for many years in finance and through the recession, my family and I were partnering with each other buying fix and flip houses, a lot of boarded up properties, direct from the bank. By 2010, decided to leave corporate America, start our company SMK Capital Management. And at the time, when I left corporate America, James, I had a 401k just sitting idle. There's no matching of course, when you're self employed. And so decided to open up a self directed aira. And I was looking for a place to invest those dollars. Can't invest in your own deals unfortunately. So I went on a two year networking binge, I call it in Southern California at the time. Just meeting a lot of savvy folks, very experienced operators, sponsors, investors, and through that process really looking for how do we achieve diversification? What should we be investing in today? Again, this is 2010, so there was a lot of fear in the marketplace and we were trying to find a safe way to continue to move forward, of course. And we ran across mobile home parks, met some operators and sponsors in that space, looked at a ton of data and analysis, just kind of found that they had done pretty darn well for the last few years and really just fell in love with the asset class really through education and then investing as an lp. And so that's how we got our start into mobile home parks. And then I would say more middle workforce housing apartments as well through that same process and cycle. And those remain some of our top asset classes today.

Great. So again, the entry point of looking into affordable housing and starting with the mobile home parks. So that was just the area of the market that you thought had the most opportunity, maybe the least amount of competition. It just seemed like the best investment at the time. Were you also thinking about this is, you know, providing this housing maybe especially for people who might not have the means. Was there something where you figured we can deliver a better product? Any thoughts along those lines?

Yeah, yeah, definitely, James. I mean what you first get interested in oftentimes is the numbers, but then if you look into the idea, you know, can we do good as well? Can we provide a better community for these folks? Is there ways to add value? Is there a way to really increase the curb appeal for everybody that lives there? All of those Come into play. If you think about mobile home park community, there's a lot of stigmas around them about what they look like and maybe not that attractive to live in, etc. I'll tell you, I visited many, many over the years, James, and sure enough, yes, there's some that are quite dilapidated, neglected, maybe the ugly duckling, right. But there's also a lot of really nice communities. You have amenities, you've got families, a lot of them help each other, some of them have community libraries, some of them have carpooling, scheduling with the neighbors. And if you can create that type of community feel, you find that the general happiness of the community goes up and a lot of the residents stay for many, many years. And so it's a win win. It's not something that's simple to do. You have to get in, but roll up your sleeves and work hard. Especially if it's a turnaround community where maybe it's been neglected and underserved for many years, it could be crime. You might have to remove all of that. Can take months, if not a year or two to turn these parks around. But when you do, I mean, it's, it's night and day, James, and you're, you really are giving back and providing more affordable housing, which is in a severe deficit in every state in this country.

So, Mark, when you were looking at these opportunities and seems like a lot of these were mismanaged, has this traditionally been a mom and pop business? I mean, I remember reading Sam Zell's book and I know if I'm not mistaken, he got his start in large part by these mobile home park communities. He certainly saw an opportunity because it seemed like the institutions certainly weren't considering them. So has it now afforded evolved into a much more efficient marketplace or is it still mostly the private investors who are showing up?

Yeah. So a couple things to share. You know, Sam Zell, their company comes out, I think it's every year or so, James. They're looking at net operating income growth through many market cycles. And this goes back over 20 years. And that was one of the charts that caught my eye when I was looking for a place to Invest, you know, 13, 14 years ago, after the downturn in the recession, that they had increased net operating income through 2008, consistently through the recession. So that correlation, I should say lack of correlations, the overall market was one of the appealing aspects to the asset class. But when you kind of fast forward to where we are today, talking more about the risk fragmentation of the industry and how it was predominantly mom and pop. I'll tell you this. Ten years ago, James, we could find mobile home communities that could produce 10% cash on cash, year one, just by buying them. There was not a ton of demand from buyers for them. And going in, cap rates were 8% plus. And today, some of those same communities going in, cap rates have dropped in half. And so the cat's out of the bag. You got a lot of private equity groups and more institutional investors over the last five years or so that have dove into the asset class. But you still have. I think it's roughly around 70% or so of our mobile home communities are still owned by mom and pop.

So, Mark, I think it would be really helpful for our audience if you could tell us about your first investment with the mobile home park. Maybe give us a little background, tell us where it was, what it looked like, how many units, price, you know, walk us through the whole structure story.

Yeah, I'll say this. It was a passive investment, James. I wasn't ready to acquire one myself and roll up my sleeve and do all that work. We were focusing at the time largely on single family and small multifamily. And so buying a mobile home community thousand miles away from where I lived without much experience wasn't something that we wanted to do. So what did we do? We partnered with a private equity group that focuses specifically on this asset class and invested with them.

So how did you find them and how did you qualify them? Because a lot of our listeners invest passively as well. So, sure, it's as much about the property as it is about the sponsor.

Yeah, 100% agree on people first, in our view. So they were referred to me, James, by a colleague that I had been, excuse me, working with for a couple years in different investments, and he had been investing with them for a few years. And so it was a referral, said, hey, Mark, if you're interested in mobile homes, talk to these guys. I've been with them for a couple years. They pay out the prep every quarter, and they're doing a really good job on improving the assets, the properties and the curb appeal at these. These different mobile home parks. It was a portfolio, James. So it wasn't just one property. I found that to be a little easier to get into that space too, rather than just going direct into one. One asset, we invested in a portfolio to help reduce risk.

And is that how you've continued to invest in the sector, or are there investments that you. General partner.

So today we will typically partner with another operator Sponsor and provide a portion if not all of the equity for the deal, depending on the size of the deal and the timing. So our, our main focus today is creating funds and single asset investments for our investor network where we partner along with a sponsor who's a specialist in one thing. So we also invest in tax exempt departments. We also invest in self storage, some triple net industrial sale leasebacks and ATM machines. We're constantly looking at who's the best in these sectors and instead of trying to compete with them, we often partner with them and invest alongside.

That's great and sounds similar. So I'm a general partner in two real estate funds and we were capital, our capital allocators as well, putting out JV equity. So I guess it sounds like what you're offering to your investors is these different portfolio. So what do these funds look like? I mean how many different investments will they typically span? It sounds like you have them focused on specific asset classes or tax strategies.

Sure, yeah, we do funds and we also do single asset investments, James. It just depends on the ebb and flow of the deals. So last week we closed on a tax exempt apartment community in Houston, Texas. 532 units and 2008 build. There's a nice value add play. And just this morning we invested in a three park mobile home portfolio in the Kansas City market. I was out there visiting the properties three weeks ago. The first deal is a single off deal, the second one is part of the fund. So going back to your question of the fundamental, this fund currently has seven investments in it, James. It spans across mobile homes, self storage apartments, triple net industrial and private real estate debt and also ATMs. So it's a nice spread and diversification of capital.

So Mark, you kind of already said it, but just to clarify for the audience, so your decision to approach this from a capital provider, limited partner capacity as opposed to doing this on your own, what drove that decision? Yeah, there's positives and negatives to both.

Absolutely. So we did it on our own. We were the sponsor, the operator from formerly from 2010 to 2017. A lot of our deals were single family, small, multifamily. James, We've rehabbed and turned around over 60 properties over the years where we're the GP on those deals. But I personally wanted to diversify to other asset classes right when I left corporate America. Reduce risk, focus on income and growth and get into different asset classes that we felt were, I would say much, much less correlated to the overall market versus maybe single family housing. And by starting out as LPs. We built relationships with different sponsors and GPs. And you know, fast forward five years later, we had made over 20 different investments as LPs with different sponsors into different asset classes while doing our own deals. James as a gp. But we decided to transition and offer a lot of these opportunities up to our investors who were also looking to diversify. And if you think about the cycle of single family, small multi family coming in from 2010 to 2017, 18, pricing just got very expensive. So you're working a lot harder for a lot less return. Deal sourcing was a lot more difficult. The market was quite saturated. So it made sense for us at that time to pivot, which is what we did, and no longer be the sponsor and operator and instead get deal flow from the operating partners that we had been personally investing with in these different asset classes.

Great. Yeah, I think that makes a lot of sense. And our decision to be operate out of a fund structure, we got a sense that yes, you could get that diversification that you talked about because typically there's very few real estate investors, operator developers who can do all the different asset classes nationwide. I mean that is very difficult to do unless if you have a lot of infrastructure. So the idea to go out and find best in class sponsors with business plans that you like. Again, you can get access to a lot of different types of investments. So Mark, let's talk about how you find your sponsors. And I know you said the last or the first one you ever did was an introduction, but what if someone's listening to this today and they want to pitch you? Mark, I've got a 400 unit apartment building with affordable component in the Carolinas. How are you going to go about and determine if that's the type of operator who you're going to invest with?

Yeah. So I'll tell you this. If it's a cold introduction and we don't know them and there isn't a referral from somebody that we know like and trust, it's going to take a little while to get comfortable with the people, James. But some of the things we look at, you know, really looking for track record, an established team both in the back office and on the ground, ideally, ideally vertically integrated in house property management, asset management if possible. It's not 100% required. We've had success both ways where it wasn't vertically integrated, but we do prefer it. Obviously we're running background checks and all the principles. We're looking at their track record a lot of times looking at initial projections versus actual performance on exits and current portfolio. How are they doing compared to what they thought References? It really comes down to the pedigree, holistically. Like, are these type of people that we want to invest with for the next decade, do we think they have some type of special sauce that we can't really find in other areas? And is it going to make sense to continue this dialogue, analysis? Conversation experience is one of the biggest. James, as a takeaway, you know, we, we do talk to a lot of, I would say, younger operators or sponsors. Maybe they've been in their space for less than five years. We'll typically shy away from that at this point, point in the market cycle, simply because we have ample deal flow from operators that have been around a bit longer. So that's a bit more on how we look at the people side.

Thanks, Mark, that's really helpful. And I want to dig a little bit deeper on one of those points you made, because I think it's so important and that's references. Okay, so what kind of references are you looking for? How do you go about sourcing those? And then what do those conversations go like?

Yeah, a few. A few ways. So we'll ask them for some. We look for business references that could be attorneys, accountants, advisors that they work with. We'll chat with them. There's other equity groups that they can refer us to that have active capital invested with them. Great. And then maybe more of a passive investor as well. And then we do a bit of our own organic reference search as well. James, you know, a quick way is you can go on LinkedIn and see who they know that you know and reach out to those people, talk to them, you know, start digging. What can you find? Is there anything that's being hidden? Is there a gap in their experience where maybe there's no deals for a year and a half, what were they doing for that time period and try and see if there's anything being left out.

Yeah, I think it's so important to check references because especially you're investing in a partner, a project, as you know, these investments, these relationships can in time take years. And you want to know what that person's like as far as when times are good, but also when times are challenging. And so the trick, I think with references, if you, you ask, usually someone is going to give you a positive reference. I think it would be very surprising if someone gave you a reference for someone who wouldn't have good things to say. So the question is, how do you find and ask those questions I know when I'm hiring, I'm usually looking and asking, well, can we speak to this specific person or if there's certain deals that that person's been involved with, to ask for references on specific transactions. So hopefully that's helpful for our listeners because not just picking a sponsor, I think that goes for anything, whether you're talking about a contractor or architect, property manager, I think getting those references, especially when you have someone that you know in common. And that's why LinkedIn is such a powerful tool, especially for those who are listening. We should be streaming live right now to LinkedIn, so hopefully you all are seeing that and taking advantage of. Okay, so Mark, I want to talk now a little bit more about how you qualify these deals. Okay, so the sponsor has checked the box. How do you know if a deal is a good deal?

Yeah, there's a few things where we look at, I mean, financial metrics, of course, operations, location. But I'll get a little specific. I think maybe that could be helpful, James, for those listening. So our goal, like what's our return target? We're trying to earn 3 to 7% cash on cash in year one. That's net to our investors. We want that to be growing. Let's say it's a five year investment. We're looking for an average annual ROI of 15% plus and average cash on cash, usually 7 to 12%. So it's usually a blend of income and growth. And so from there we're analyzing pro formas analysis assumptions, diving into some of the financial metrics to see if we think they're realistic, if they're conservative, are they aggressive? You want to walk away from the deal underwriting process being able to have high conviction, saying to yourself, I think this deal has a very high likelihood of meeting or beating the projected returns because you can manipulate returns very easily. In five minutes, I can take an IRR from a 12 to a 19 if I have a financial model. So we watch out for overly aggressive assumptions. Some of the things that help, I would say, point to a little less aggressive assumptions when looking at underwriting. I mean, some of the asset classes we focus on, James, a big advantage of them is low operating expense ratios. So there's a lot more meat on the bone, more cash flow. Mobile home, self storage, for example, it's not uncommon to have a 30% operating expense ratio, sometimes lower. And tax exempt apartments can be right in that range as well. We look at rental growth projections. What's actually happening in the market today? Where do we think they're going a lot of times look at market Data provided by third parties CoStar Real page, trying to determine trends in that specific submarket and what are they, what are they putting in their pro forma? Is it, is it conservative? Is it realistic? Is it achievable? And then also look at, I mean, a big one is if you own property in that submarket, show me how it's doing. What have you done since you acquired it? How is it, how is it performing relative to this new deal down the street that you want to buy? If it's underperforming, you're not able to get the rents, why do you assume you can get it over here and start asking those kinds of questions? Maybe one last point for us. We like to look at the total return and what percent of that is being derived from the cash flow while we hold versus the appreciation at sale. And that helps us kind of get a gauge of how much of this return is upside potential from the sale versus operational cash flow while we're sitting on the property. And if you have 80% coming from the back end, James, it's a higher risk investment versus maybe cash flow of 40, 50% and appreciation of 50, 60%. So that helps us gauge overall risk of the deal as well. And a lot of it comes down to just asking our operating partners, where are you being conservative in your underwriting and assumptions? It's funny how people don't do that, but you can just ask them and they might point out certain areas of other income. Well, we didn't include adding, you know, whatever it might be. There's a lot of different other income items. We're going to build a dog park. We're going to allow pets. There could be a pet fee that's not built in. So you want to try and see if there's additional cream on the deal that they're not including, or is it more of a all the stars have to align just to get to the projected return.

Mark, thank you for sharing. That was a lot of great information and I hope our audience here is taking notes. And I especially appreciate what you had to say about where you're driving your returns from. If it is that value add component, the cash flow, or is the success of the investment dependent on that exit sale. And as we're recording this today, we're hoping that rates have settled. I know there's plenty of investors out there that are hoping that rates will be on their way back down and cap rates will compress again. But I would not be making an investment that solely hinges on interest rates coming back into previous ranges. So I think that's really good advice that the deal has to stand alone with its add value and cash flow potential. So Mark, I did want to also ask about qualifying opportunities and what constitutes a great purchase price. And I liked how you talked about really verifying assumptions and the comparables, the rents. How much diligence are you doing on the marketplace? Are you talking to professionals in the various area investment sale brokers? How much are you really trying to understand about the actual purchase? Maybe the profile of the seller is important for you to understand how the deal came to be. If it's on market, off market, tell us about how much you research the actual transaction and maybe how it relates to other sales that have taken place in the market.

Yeah, it's important, very important, James. Especially today there's a lot of uncertainty to asset values with all the change volatility in the market. So you gotta, you gotta feel comfortable about what you're paying for the property. And I don't think there's a crystal ball here. It's digging into the weeds sometimes. Comps are hard to find, James. The last year hasn't been a lot of transactions. So we'll even go back even further if we need to, to 2021, 2022, where we, we know where the market was then. And if you're paying the same price today, I'd be very cautious about that. And so that's a quick gauge that data is available. Even though the comps have been a little thinner in 2023, you can keep going, keep going further back because we know what the market's been doing since then. But I'll give a quick example of the story that you mentioned because that to me is one of the most important parts. We look at a lot of deals, James. 10 to 20 deals a month, sometimes more. We invest in 5 to 10 a year. So it's very much a filtration process. One of the biggest criteria that I find gets us excited about a deal is the story what makes this special, what's different about this one versus the others that we keep looking at. And so here's a quick story. I was in Kansas City three weeks ago touring a few properties and one of them was a self storage property. It's been owned by husband and wife for over 20 years. They're in their 80s, they're elderly couple, they've been managing it themselves. The husband recently passed away and the wife is not involved in the asset anymore. She doesn't want to have anything to do with it, James. So they kind of stopped collective rent. I say kind of because there's a little mailbox that people can put the rent in at the office, but it's been essentially been neglected. They also haven't raised rents in over five years. And there's a huge opportunity there. Operating partners are buying it direct from them, all cash. They're coming in 10 by 10 storage units are renting for $80 a month. The market is $125 a month. So you can do a lot in a very short manner of time. But she just wanted to get out. Right? So this is a mom and pop seller. The funny story, I was trying to find the property, James. I googled it on my phone. It took me to a completely different self storage facility. It takes you to the competitor. So this is a story I can get behind where the asset has been, you know, heavily mismanaged. There's a lot of room for upside just based on market comps. I know what the self storage facility down the street is renting for, etc. So doing that on the ground, boots on the ground homework is, is very valuable in addition to behind the desk.

That's a great story and certainly illustrates the background of the makings of what sounds like an incredible opportunity. So appreciate your sharing that. So, Mark, I think you said that for a lot of these investments that you are the majority of the equity. So maybe talk a little bit more for our audience about where you fit into the capital stack, how that works. So there's a general partner, you're a limited partner. Maybe talk about how that structure works, both financially but also how decisions are made.

Sure, yeah. So from a decision standpoint, James, we are relying on our operating partners to execute the business plan, to manage the asset. The tenants, the financials, they report to us frequently. Depending on, depending on the investment, James, it could be weekly, it could be monthly, sometimes quarterly. We do invest in minority positions and deals too, James. We invested, for example, recently into a 2, I think it was a $1.5 billion assets under management multi family portfolio. We were some of the last capital into that fund and so we invested a few million dollars into it. So we are not a majority piece of that fund at all, but we've been tracking it for a year and a half and so we've been waiting to see that portfolio build to understand what they've been investing in, how it's performing. And we were very pleased with that investment. And then there's other investments where it might be a much smaller deal. Maybe a $5 million acquisition of a mobile home community. 70% debt and the remainder being raised where we could be side by side bringing in the equity with our operating partners. We do always require them to co invest and that can be a JV agreement, it could be a co gp. There's different structures on those types of deals. At the end of the day we're trying to provide our investors with with better returns than they could get on their own.

Right.

So we're usually negotiating that with our operating partners but at the same time keep keeping them behind the wheel. Occasionally we have control provisions and consent rights, but it's not, not a hard and fast need for us.

That's great. And the priority of the cash flows or is every single deal structured differently? How does this typically work with the return of capital?

Yeah, it's deal dependent and sponsor dependent. So most of them, James, preferred return or the split above it, annual asset management fee, maybe a refinance fee, this kind of thing that our operating partners are charging our entity. And so we typically will negotiate on those terms to make sure we're getting the best terms we can for our investors.

What are the typical asset management fees and other maybe you could even address for some of your sponsor partners who also self manage. So maybe just give some guide rails because you know there's a saying that you don't want your sponsor to fee out of the deal and so maybe talk about what's appropriate. Let's say it is self managed, maybe talk about what that looks like. You know, is there a disposition fee? Do they get compensated on a refi? What do the percentages typically look like for that?

Yeah, again it varies. James. I'll tell you kind of where the middle ground is that we think we're comfortable with. But it's all dependent on the sponsor and what they feel the fee structure should be for that deal. And it also depends on some of the deals, James. If there's a big heavy value add lift, you'll often see either a construction management fee built in or a little bit higher property management asset management fee. It depends how much work they have to do. But generally speaking we'll see anywhere from on the very low end half a point up to about 2 points annual asset management fee. That's usually on the equity in the deal. And then you'll see like a property management fee on the Houston tax exempt apartment community that we closed on last week with our operating partners is I think it's two and a half Percent that can go up to three, not too much higher than four if you're paying more than that. I would ask them why. Disposition fee might be about a percent if there is one. And then if there's any, you know, guarantee, loan guarantee fees that, that can be in the same range, 1, 2, 3%.

Okay, no, that's very helpful. And then as far as, again, I know the pref. The waterfall varies deal to deal. But what seems like a fair. First of all, how much equity do you like to see from these sponsors in a deal? And then what is a typical craft waterfall that feels right to you? So is there anything, you know, not specifically getting into preferential returns based on the various asset classes or risk profiles, but what do you. When you see something and you're looking at dozens of these, like you said, every month, kind of seem in line, whereas some might seem like the sponsor is maybe being a little bit overly.

Yeah, again, it's a widespread. James, I'll tell you on the, the no thank you side, we'll just pass on these terms. We've seen 5, 6% pref and a 40, 60 split, 60 to the sponsor, 40 to the investor with you know, maybe 3% asset management fee. We, we can't touch that. It's just too expensive for us. And then on the, I would say the more profitable side, you'll see maybe a 10% pref annually. Still, it's hard to find those these days. It was a lot more common five years ago with a 80, 20 or even 90, 10 split. Very favorable terms there and potentially just a 1% asset management fee. So somewhere in the middle is where a lot of the deals typically land. James, you can see maybe a 70, 30 or 75, 25 split over a 7 or an 8 pref is very common.

And do you like or do you mind when there's a waterfall where there's different pref space or splits rather based on certain IRR hurdles.

I prefer to participate vis a vis in the upside potential as much as we can. So a lot of times you'll see a up to a 14 and then they're going to split it from 75, 25, 60, 40. That could be an area we negotiate on, James, but it's no hard and fast. But if, if it ends up going 50, 50, you know, that to me is, is a bit too aggressive. And most of deals we don't, we don't do much with 5050. So that gives a gauge of where we like to be.

Especially when you're bringing the majority of the capital. So no, we thank you for spelling that out because I know of a lot of our listeners they're looking for guidance on to be fair. Right. That's what, that's what you want in a great investment. You want the sponsor to be rewarded. Because look, if it's too investor friendly, where's the motivation? You want that sponsor to be motivated to really make sure it's as successful as possible and not be decided incentivized if they don't feel like they've got skin in the game. So I think that's also important.

So let me add one more point to that because you know, what we've seen over the years too is sometimes the preferred return structure with a split above is not in the investor's best interest. Why is that? It's because if a deal isn't going well, the sponsor may have literally may not make anything on it. And so if they have to continue to grind and work for two, three more years just to get your principal back or maybe just pay your prep and catch you up, there's no upside for them. So their motivation level is very low. And so pros and cons to every structure. What we're doing in a fund right now is just a straight cash flow split. The more money that comes in, the more we all make. It's a 80, 20 to a 90, 10 net to our investors. And so there's no pref. So whatever we can do to increase cash flow, we all benefit. And that, that to me is a little bit more aligned, but maybe a little bit less of a market rate deal that you might see today.

Got it. So these fund structures, you charge your own asset management fee and then it's just a straight split of the cash flow. Got it?

Correct. Yeah.

So you've, it should be evident the value that you're bringing to the table through your diligence, certainly your relationships, your deal sourcing. But for people who are listening to this, who are thinking, Mark, this sounds great, but you are an extra layer in the transaction, right, where there's a double promote. So here I am paying a promote to you. You're getting promoted by the sponsor. So what would you say to that?

Yeah, yeah, great question. A lot of our investors ask it. And so we really mitigate the double promote things by negotiating better terms for our investors. So the net return, if you went direct to a deal first, coming through us, is going to be pretty darn close. But then of course there's a fee to SMK to source Underwrite, manage the investment from start to finish. And a lot of our investors are looking for that. They want, you know, if they're not full time real estate investors, James, a lot of them don't have the time or maybe the interest or the experience to go out, source these deals, to underwrite them, to vet the people and to really, you know, pick great opportunities. And so there, there's got to be an alignment. If you're an active full time real estate investor and you can go source your own deals, then we may not be a great fit. But if you're looking for someone to assist and navigate the waters and create great opportunities, you know, that's really where we fall into place.

Wonderful. No, that makes a ton of sense and I've certainly received that question as well because our fund was in a similar type role. So, Mark, why don't we. Now I want to talk a little bit more about your investor base. So talk about how you've cultivated your investor base. What does it look like today and what are you doing now to grow it?

Yeah. So how did we start? Well, it was just family, James. While I was working in corporate America, my brothers, my parents, my aunts, my uncles were all chipping in as LPs and myself and my father were operating the assets. And so that was all good and well, but once we decided to go full time and open up our firm, the first thing we did, James, is in 2010, we invited pretty much everyone we knew to come over to our house for an old fashioned PowerPoint presentation business plan and provided food and drinks of course, so that they would show up. And we pitched them on a blind pool fund. Go figure, in 2010. So it was a tough time to raise money, but we started just for people that knew us and trusted us. And those that invested with us at that time wasn't because the fund was some amazing investment vehicle is because they trusted us. And so that's how we got started. Since then it's been largely referrals and a lot of organic growth just through talking to folks, networking, doing good for our investors, and continuously providing what we think are pretty outstanding opportunities. And that's predominantly how we do it. There isn't a lot more to it for us. A lot. Most of our investors are accredited, high net worths, a lot of entrepreneurs, self made, a lot of C suite executives. We also have a lot of Doctors, accountants, attorneys, etc.

And how do you. So is it mostly word of mouth or what are you doing to let the market know about what SMK is doing.

I mean, it's, it's. We have a quarterly newsletter, James. We're constantly sending out market data to our investors about what we're seeing out there, different trends. I'm on a lot of podcasts like this, of course, as well, which helps spread the word and what we're seeing, where we think there's some good strategies still today. So it's a. It's a bit of a combination of sharing information and updates with our current investor network and also talking to savvy folks like yourselves and sharing conversations through podcasts.

That's great. So. And there's only so many hours in the day, and time is your most valuable asset. So how do you schedule your day? How do you prioritize and think about these various things? Because there's a lot of different parts to your job and I'm sure you've got a great team behind you, so. So maybe you could talk a little bit about that as well.

Yeah, yeah, it's. It's always a challenge. I'll just say that, James. But been doing it full time for a little over 13 years and so got a nice balance where I'm always available for our investors. That's first and foremost. They all have my cell phone number, but they don't abuse it. They understand the cadence of information and updates and distributions, but if anything comes up between those reports, they all can email me or call me at any time. Right. So that's part of it, but also making sure that our investors are in alignment with how we communicate and when. And I think an important part of that, James, is when we send out a quarterly update or performance update on an asset. We spent a lot of time on that communication piece because at the end of the day, if you're an investor and you get an update on your investment, you want to be able to essentially have all your questions answered through that update so that you don't have to reach back out and ask more questions. Well, what about this? What about that? So we think about that pretty closely anytime we're sending out updates and communicating with our active investors. And it helps reduce the amount of time that I have to spend, of course, answering more questions from active investors. That's one piece of it as far as day to day business and operations. You know, one thing I do, James, is just about every night I will plan out my next day, if it's not already planned, and kind of try and get one, one or two steps ahead of what's coming. Sunday evenings, same thing I Reserve some time out to make sure I understand what's happening in the week and where the priorities are. So it's very much hands on. But I think after time of doing this, you, you get a momentum and a little bit of cadence that helps you stay sane.

That's great. And Mark, I know we generally like to talk about good news, but when there are challenges or bad news, how do you address that?

Sure, I mean, we will do a few things. If there's something that's not going according to plan, we often over communicate. We'll add a lot more context and detail to our updates. Sometimes I'll record a video for my investors so they can hear what my thoughts are and what's going on. So it really comes back to, you know, if things aren't going well, you should increase communication and you should be even more detailed and transparent and be even more open. So in those times, if that happens, James, I'll open up my, my calendar a lot more so that people can book calls and just be available to answer questions and tell them what's going on.

Mark, that's super helpful and I really appreciate your sharing that as I'm sure our audience does as well. And it's tough. No one likes to deliver bad news, but. But if you aren't upfront about it, it's not going to get any better. In fact, it's going to get worse. So that really makes a ton of sense and I love that need to over communicate and that you're doing that so well. Mark, this has been fabulous with only a couple minutes left. Just advice. And we have a lot of aspiring investors. We have college students, master's students, seasoned pros who listen to this. What would be your advice for them right now? I mean, certainly some challenging times that we've come out of, some would say incredible opportunity. Now, what would you tell someone about entering the real estate market now?

Yeah, look, don't try and time the market. Number one, we don't. If I knew how to tighten the market, we wouldn't be chatting. James, you'd be doing something a little bit more advantageous to the world. But the point of it is, unless you think there's going to be a major, major correction like in early Covid in 2020, James, we stopped investing entirely for over seven months. We didn't make any new investments because there was too much risk that everything could have fallen apart. Right. Stay at home and don't work is kind of a recipe for depression. And so if the economy goes into a great Depression, you're going to want to be very careful and probably hold on to everything you have, but we don't see that today. We think there's definitely some volatility, but there's also a lot of great opportunities. So I think it's a great time to get in. You know, pricing has actually come down and Most assets maybe 20, 30% in the last 16, 18 months or so. So if you're trying to time the market, I would say don't just try and find great investments with great people and do a bunch of homework. Be cautious, move slow, be patient, don't be emotional. You can keep the emotion out of a deal. That'll help a lot. And again, if you can align yourself with those that are true seasoned experts with very high pedigree, you'll probably be much better off than trying to learn it all on your own.

That's fantastic advice. And for someone starting off, whether, do you have any thoughts on, does it make sense for them to start off at a big shop, a smaller entrepreneurial shop, try to figure it out on their own. What's, what's your preference?

I've seen success in all three strategies, James. I think it depends on the person's personality, their character, their strengths. If you're a hustler and you're a go getter and you want to work 60, 70 hours a week and just bust your butt and read anything and everything under the sun and network and just be a sponge for information, you'll probably be more, more successful than others in being active and doing it on your own. If you maybe are a little cautious, you're a little scared. Fair enough. We all are. Right. You can probably start with a, a larger shop, learn a ton, work there for a few years, see what they're doing. And then also a smaller shop might ask, provide you a little more, be a little more nimble, maybe grow sooner, maybe quicker with the firm, maybe be a little bit more effective on changing investment strategy and pioneer certain things in third time. But all of them can work. I think it just comes back to person's personality and their strengths.

Great. So, Mark, the title of this show is the Insider's Edge to Real Estate Investing. What does the insider's edge mean to you?

Yeah, you know, I stress on the term inside. Right. And so it comes back to people. For me, if you have the right people in any investment, again, being inside, in that, in that bubble per se, you have a much better likelihood of doing well.

Perfect. Yeah, no, it's big, big part of My book, this is a Business about the People. The first interview I ever did with Bruce Ratner, prolific developer here in New York, he said the word mentioned people or his team more than 50 times in an hour long interview. So certainly that's a big part of it. And then Mark, what would you say are your skills or keys to success that have kept you going?

Yeah, I think one of the big ones is attention to detail. James. I was an analyst for many years in finance and I was also in operations management and those two skills mesh pretty darn well with real estate investing. But paying attention to a lot of the details, trying to understand what's going to happen if you do execute this business plan or, or go to try to, what kind of hurdles are you going to run into, what kind of trouble and how are you going to handle it along the way? Right. And so nothing ever goes perfectly in these businesses and these investments. So what kind of detail do you need to be concerned with to ensure if you got to steer the ship left instead of right and do you have the right people that can execute on that? So detail oriented, I think is a big one for me.

That makes a ton of sense and it is sometimes, you know, people overlook that or think, oh, I just want to be part of the big picture. But this is certainly a business where details matter. So Mark, you've got a really incredible story and we're just so grateful that you have shared it today with our audience. I know they're going to get a ton of value out of this. I know I did. So Mark, just in conclusion, what's the best way for people to reach you or find out about what SMK Capital Management is doing?

Yeah, yeah. Thanks for having me on, James. It's been fun chatting with you. My Email address is infomk cap.com Our website is smkcap.com we got a lot of information on there. People can sign up to join our investor group schedule call, let us know how we can help.

That's wonderful. Well, thank you again, Mark and thank you to all of you who are listening and we really appreciate the support. We're here to help you gain the insider's edge to real estate investing so you can outperform the market. And if you like this show, please add your comments. It really means a lot to me. Certainly connect with me if you have not already at James Nelson NYC with your questions, comments for future guests and share this with a friend if you found helpful. So wishing you all the success until next week. Thank you again for Joining Foreign.

Thank you for listening to the Insider's Edge to Real Estate Investing. We appreciate your subscribing and sharing with your friends. If you haven't already, please connect with James at James Nelson NYC on LinkedIn, Instagram and Twitter. Please also visit jamesnelson.com where you can find the show, notes and other episodes along with an exclusive video series and other helpful resources so you can gain the Insider's Edge to Real Estate investing. Until next week.