#57: Investing in Real Estate ft. Max Sharkansky, Co-Founder of Trion Properties

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Welcome to the Passive Income MD podcast where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey, everyone. I'm super excited to talk to Max Sharkansky today. He's the co founder and managing partner of Tryon Properties. It's a private equity investment company that focuses on multifamily properties and They've done over $700 million in transactions since their inception in 2005. They've generated an average internal rate of return of over 30% for their investors. I've known Max for a while, and this is an interesting conversation that I've wanted to have for a while. I think many of you have invested in syndications or funds or have been interested in investing in it. You've seen some deals, but you have no idea what it took to get those deals in front of you. The inner workings of a syndication are fun. That's something I've always been curious about and Max has been so willing to come and talk about it today. Peel back that curtain a little bit. Max, how you doing?

Good, good. How you doing?

I'm doing great. Did I get that intro right? Did I get everything that I need to do to talk about trying properties and yourself?

You did. You nailed it. You nailed it. That's amazing.

Okay, awesome. Tell me about your background a little bit and how you ultimately got into being a co founder of Tryon Properties.

Sure. So I started my career as a broker at Marcus and Millichap. Right. When I graduated Loyola Mary Mountain la, I got a job at Marcus, worked as like a salesperson, intern. So I had an internship for a year and then became a broker. And a few years into it, my childhood friend Mitch Paskover and I decided that he was working at HFF on the debt side. And we decided that we didn't want to be in services for our careers and we want to be on the investment side of the business. So I was working multifamily properties in the San Fernando Valley. So naturally we started buying multifamily properties in the San Fernando Valley. That's where I had market knowledge. It's where I had access to deals. And we bought our first couple deals there and then from there it just snowballed. So aggregated a small portfolio in the last cycle, started buying in 05, left in 06, and opened up our own shop and do it full time. We sold our portfolio in 2008. So we had a pretty fortuitous timing. And as we were selling in 08, we changed our strategy from buying value add multifamily to targeting non performing debt secured by multifamily. The way we looked at it at that time, a lot of the owners weren't really owners, they were just zombie owners. And that was during the first wave of defaults. So instead of calling owners and trying to get access to deal through owners, we started calling banks. We were a little bit ahead of our time by about a year. It took us about a year for our first closing. We bought a few non performing notes from East west bank and from there it just snowballed. And we bought about 20 deals during the downturn. 9, 10, 11, 12. And all of them were lending institutions. We did not do a single deal from a private individual or group at that time. We only bought from banks, servicers, the agencies. And coming out of the downturn in 2012, we went back to value add and we've been growing that business ever since. We've bought.

Where are you guys buying mostly?

So we started out very organically back in 05 06. We started out in the San Fernando Valley. Then we grew to other parts of la. Then when the crisis happened, we just kind of went wherever the banks took us. We started going to Fresno and San Diego and we started buying all over California. We were buying a lot in Sacramento. We did great in Sacramento. And then we got comfortable going out of state. And as we sit here today, we are in California, Oregon and Colorado. We are also opening an office in Miami. I'm going to move to Miami June 13th of next month and we already have our first hire. We're looking at deals. We're in a few bets and finals in North Carolina, Georgia, Florida. So we're really, really excited to get that office open and expand the company.

I mean that's amazing. The growth has been phenomenal. It's not just you and Mitch anymore, right? What does the team look like?

That's a great question. No, we're not just two guys in a small office. To scale at this level, you have to have an organization. Our organization also isn't just a few people very dissimilar to our competitors. We are a full vertical organization, meaning we do all of our own property management and operations. We do all of our project management with construction. So we're a vertical organization and everybody's here in house. So we've got an acquisitions team of about four or five people. We have an operations team of I would say around 10 people, 12 people. Now project management is two people in the office and a crew in California and Oregon of about 10 to 15 people. And I'm going to be launching and building the office in Miami and hopefully a similar fashion.

I mean it's amazing that this whole thing is built out. You've got a whole team in an office at this point. So now I want to get to. The reason we're having this interview is we as investors, we oftentimes see these deals, they look pretty, these offering memorandums, they come to us and they just pop into our email or through word of mouth and this sort of thing. But oftentimes we have no idea what it took to get there. So I'm just curious on that level. Where does this whole process start for try on for any of these syndication companies when they think about trying to put an investment in front of an investor? How does it all start?

That's a great question. It starts out with the acquisition, right? So the way to do it in the very beginning is you have to plant a flag in a market, right? So if you're going way back when we started buying in the San Fernando Valley, broker saw us in the comps, we started to get more deals in the Valley. By the end of 06, I want to say we had five or six properties in the Valley, which was really, really great pace. Then you start to move to other markets, right? So at some point, and I want to say 15, 16, we bought our first property. We made a conscious decision that we want to be in Portland. So we loved all the growth, economic growth, population growth, high quality of life, very affordable. It's the most affordable market on the west coast. So we decided we want to be there and we started looking at deals. We bought a marketed deal that we felt was a fair deal. We're not looking for anything, any kind of a smoking deal to make some sort of a home run return because you're never going to find that as your first deal. So we fought, we got our first deal, then we got into the comp set and we've got something to talk about with the brokerage community. And then they start to bring you deals and you really start to see big growth in your deal flow and in your acquisition pipeline. So that's really the trick. You got to find that first deal and then from there it just snowballs and you get a lot more deals.

I mean, where do you find those deals? Like who are you talking to? Are there listing sites online? Are there specific people that you're talking to? What are you doing actually to uncover and dig out those deals?

So our acquisitions team is mostly talking to the most active brokers in the market. Yes, there are sites. So for some of the listeners, if you want to go buy your first 5, 6 unit deal and you want to do it on your own, you don't want to invest with sponsors like us, which is great, that's fine. You go to a site like LoopNet or Crexi, and you talk to some of the brokers and you look at some of the deals. And that's one way to do it for us at a larger, more institutional scale. We're usually just going to the comps, calling the most active brokers and telling them who we are, who, how we operate, and they'll show some deals. Of course, at first they're marketed, and then we'll write offers. They see how we underwrite, they see how we behave. And again, once we get that first deal, from there, it really starts to scale.

I mean, how do you know when you're writing these offers now, how do you know what makes sense for you to go after? And how do you decide on what you end up offering to purchase these properties?

That's a great question. You back into it, you do a lot of research on the property and its surrounding market. So you're looking at the rent comp set, you're looking at the sales comp set, you're figuring out how much it's going to cost you to renovate, and you're plugging all of this into your financial model. You're putting in your Pro Forma rents, 10, $12,000 a unit. You're looking at the sales comp, so you're figuring out where your exit cap is. So if it's a 5 cap, you probably want to be at least a 5 and a half to 6 cap on cost. You're plugging in your rent growth, and you're figuring out how much rent's going to grow over the next two, three, four, five years while you hold the asset. And you put all of these assumptions into your model and you reverse engineer into a purchase price.

I mean, how long does that process take for you now with the team that you have? How many people are in there digging at those numbers, looking at it, crunching all those things to create kind of like that ultimate final determination?

The acquisitions team is a handful of people. It's a combination of analysts, associates and senior managing partners, directors. And once they Find the deal. We've got two models. One is more of like a one page model where you could see does this work on the back of a napkin so that you don't have to spend the hours that it requires for a full financial model, which is like a 15 tab, very complicated spreadsheet with a 10 year cash flow that requires a lot of time and effort and we don't need to do that on every single deal. So we'll plug it into a one pager first, we'll figure out what the rents are, we'll figure out what our exit cap is. Keep in mind, most of the markets where we're looking at deals, we're already in those markets. So we have an idea of what some of this stuff already is. We know market rents, we know what the sales comps are because we already own in these places. So uh, we've got almost like a little bit of insider information versus somebody who's trying to enter the market. And yeah, we plug all that stuff into the one pager and then if we feel that it passes muster on the one pager, then we'll plug it into a full model.

Gotcha. And then is this whole model something that you've kind of refined over time or is this something that's like generally available for people to, to use and to kind of piggyback off of? Like, how did you come up with that model?

Yeah, it's something that we've refined over time. We've been using the same one for almost a decade and we've refined it over time to change LPGP economics, rent growth, assumptions on rent control versus non rent control. So it's very, very complicated and we can put almost any assumption into it.

And so when you do that and you're thinking about investors because you ultimately, you know that you're going to want to bring investors on board. Like how do you know that the investors will be interested in what you're about to offer?

Well, once we actually have the deal under contract and we're raising money for it, we'll put everything into a deal brief where it's like an offering memorandum and we'll put it into, then put that document into a PPM along with the operating agreement and all the legal documents. And in that deal brief we have what our assumptions are, what's the business plan, here's what we're going to do, here's how we're going to execute on it, here's how much we're going to expand. Here are the rents today. These are the rents that we think we're going to achieve, and we think we're going to achieve them based on this comp set. And then once we have all that, here's what our net operating income will be and here's what the cap rate will be based on what we expect. And then we think we can revert at a profit based on the market cap rates being X amount lower than what we're actually at.

I mean, because you already said that once you lock it up, then you take it to investors. Right? But at the same time, before you lock it up, you have to have some sort of understanding that, hey, people are going to actually want to invest in this. Right? People are going to want to actually, when you put it out there, otherwise you wouldn't get it, you wouldn't put it under an offer or you wouldn't purchase it for that amount. Do you have an idea already of what the investor appetite is for something like that? Or do you also kind of like pre sell it before you actually put down the offer and actually take, you know, win the offer on that property?

No, we don't pre sell it because we have a pretty good idea of what everybody wants to see in terms of return thresholds, which is really what it comes down to, right? Like, how much am I making on this? What's the cash on cash return? What's the IRR? And usually if you're at a low to mid teens, 13 to 15 on an investor level, IRR, that works just fine for everybody. That's 70 to 90% more than you're going to get with the S&P 500 on a historical basis. So that works. And if we can reverse engineer, like I mentioned earlier with the price, the way we come up with that price is just irr, right? So once we figure out our comp set and what's going to be our pro forma noi and how much the property is going to be worth once we're done. And then we have to back into a purchase price. We want to know what kind of debt we're going to be able to get and how much equity we're going to put in. And on that equity, what's going to be our return.

Got it. Okay. So now that you've identified that you looked at a property and you said, all right, this one might work for investors, this works for our numbers. It passes our model, passes our test, then you put an offer in. I mean, these days, how competitive is winning that offer?

It's extraordinarily Competitive. There's a lot of liquidity in the system, an extraordinary amount of liquidity. A lot of the opportunity funds that we're buying, office, retail and a hotel, have gotten away from office, retail and hotel. So there's even more money in our asset class and it's just extremely competitive. We have to do everything in our power to stay as competitive as possible.

So, yeah, I mean, what is it that ultimately wins the deal? Is it just purely the amount of money that's brought in? Is it the highest bidder wins or are there some other kind of X factors that are part of that as well?

That's a good question. So we got to get as aggressive as possible on price. We're not, you can't over negotiate a deal because then you're just not going to win it. So you really got to come with your best foot forward. And we just write with really, really strong clean terms so that the seller knows that we're going to perform and that's really ultimately what the seller want. They want the best price with a buyer who will make it easy on them and knows and they have a certainty of close. And we do everything possible to show the seller and the broker that we're going to perform at the highest possible price for the highest possible price for us and, you know, get a strong price for the seller.

Okay, so then once you actually, let's say an offer is accepted, boom, you're done, you're in. Then how soon after that do you start going out and raising money from investors?

That's a great question. It really depends on the size of the deal. As a rule of thumb, if an equity check is around 15, $16 million, we know we could probably syndicate the deal. So we'll package it as fast as we can, get it into our online investor portal and send out the email blast. So we'll try to do it within a couple weeks of putting the deal under contract and within a few days of going hard on our deposit. And that gives us about 45 to 60 days to raise all the money. Usually we don't need that much time. We just, for example, tied up a deal in Portland, Oregon and we raised all the money in less than 24 hours on an email if the deal is larger than 15, $16 million in equity. So if it's a $50 million plus deal and it's got a $20 million plus equity check, then we probably will not have enough money internally to do that deal, just meaning with our database of high net worth investors. So we'll usually go get an institutional equity partner and do it that way.

Got it. So what happens when investors like me invest alongside of institutional investors like that? Is that pretty much the same, doesn't affect me at all as an investor? Or is that because we hear about that all the time, that there are institutional investors investing alongside with us on deals and this kind of thing? And I always wonder what the benefits or the pros and cons of that are.

Sure, there are a few pros and cons. I would say sometimes as an investor, the sponsor will give you the same economics as they're dealing with the institution, which are different than what you normally get as a 50 to $100,000 investor. So if you're getting the same economics as the sponsors getting from the institution, that's a huge pro because you're getting a lot more of the profit than you would just a regular LP in a deal? I would say one of the cons is the sponsor is going to lose some control over the deal. So the sponsor is not going to have major decision rights like when to buy or, I'm sorry, when to sell or refinance the asset. They have to get approval from an equity partner. And you know, as an investor, as an individual investor, you're ultimately investing with a sponsor and you want the sponsor to have as much control as possible. So you do lose a little bit of control if there's institutional equity involved.

Got it. All right, that's good to know. Now, how many deals would you say, or how many offers are you putting out there and actually. And actually winning?

Right?

I mean, guess what that percentage is. I'm just curious, like, you know, for a lot of people out there that are home buyers right now, I have friends who are looking for homes in this type of market. They're putting in offer after offer after offer, and at a certain point they start to kind of get, I don't know, feel like almost giving up. Because it's just there's so much, like you said, liquidity or cash out there chasing these offers, would you say, these days, like, how many offers are you putting out there and then ultimately actually winning those properties? Because I see a good amount of deal flow coming from you. So you are getting offers, but what does that look like for people today, like on, on the, like, syndicator side?

Well, there's a few components to that. So you see a good amount of deal flow from us. We also get a lot of deals off market. We have planted our flag in several markets throughout the western states. So we get a lot of deals off market. You're seeing a lot of that. If we see a good deal off market, we perform very quickly and get very, very aggressive. So that's a lot of what you're seeing. And then what was the other part? How competitive it is and how many offers you have to write?

Well, I'm just curious, like out there, it sounds like if the off market deals, that means they're coming specifically to you, right? Or you're working with them directly one on one without a fair amount of competition. Is that what it means to be off market?

Yes, that's correct. We get it through a broker that's showing it, usually just to a few buyers. So, okay, a lot of the times, yes, we are competing, but instead of competing with 100 buyers, we're competing with four buyers, which makes it much easier. And then in terms of ratios, it just really depends what your approach is. There are some groups that like to write a lot of offers and participate in every deal is on the market. We don't do that because we find that to be just not the best use of our time. So if the broker is guiding us to a price that we think is somewhere where we can transact, then we'll work on it. So our ratios might be different than a group that writes a lot of offers. So, you know, they might, you know, if they're going to write a hundred offers, they might win one or two deals. For us to win a deal or two, it might take 10 to 20 offers because we're going to work on the highest probability deals.

Okay, gotcha. All right. No, that makes a lot of sense. It seems like in this type of market, you got to have those connections to actually get a deal done. I mean, that's, that's what I'm gathering from a lot of the people that I'm talking to. But it sounds like all the groundwork that you've laid, you know, over the years developing those relationships have truly helped. Now you're going to a lot of these new markets that you're talking about, and you've already started to kind of have. Have some good success there. Like, what has it taken for you to now get into those markets when I'm sure there's already been, you know, a fair amount of people that have already been there. So what have you been doing that has allowed you to be successful? There's.

In new markets.

Yeah, in new markets, you just got.

To get really, really aggressive, especially in the beginning. It just goes back to general acquisition strategy. When you're entering a new market, you tell the brokers who you are, what you're all about, how many units you own throughout the nation, something. As we're expanding out to the Southeast, a lot of the big name firms, what I've been doing on investment finals is I'll put them in touch with some of their colleagues on the west coast and the LA office, San Francisco office, Pac Northwest offices and all use them as a reference to tell them how we perform on deals. That really, really helps. And then we write with very aggressive terms and that way they know that we're not just going to tie up the deal and then pull out because we make it virtually impossible for ourselves to pull out of a deal.

Got it. And what prompted the move to those new markets, like what are you seeing out there at this time that gets you excited about that?

Yeah, that's a great question. The move was really twofold. One part of it was to diversify out of California. We own a lot in California and California has just become a very difficult place to do business, especially for our industry. The last five years have just been vicious with new regs coming out of Sacramento, coming out of city halls and it's one thing after the next, and it's just become a very difficult place to do business. And what we don't want to do is see what happened in New York where they implemented a very draconian vacancy control law and that wiped out the equity for a lot of landlords. And we don't think it's going to happen here, but anything's possible and we don't want to get wiped out. We've been doing this for a long time and we've built up a nice business and we don't want our investors. At the end of the day, we're fiduciaries, so we need to do whatever we can to protect our investor capital. And we don't want to have too much of it in California at any given time. So again, that's half the story. The other half of the story is just growth. There's a tremendous amount of growth in the Southeast and the Sun Belt. It's a very friendly place to do business. You're seeing a lot of corporate growth go there. We're seeing Apple recently is opening a campus in Raleigh. Apple's HQ2 is in Austin. Tesla is opening in Austin or somewhere outside of Dallas. I forget where Charles Schwab moved. I mean, we're just seeing all a significant amount of corporate growth out of California, New York, pac Northwest and they're going into the Sunbelt. And so that's creating a lot of jobs and a lot of phenomenal economic drivers. And also from an individual level, it's very affordable. Places like la, San Francisco, New York, Seattle, they've just become extremely unaffordable and very difficult places to have a high quality of life. So people can move to the Sun Belt, they can move to the Southeast. Great places like Tampa, Atlanta, Charlotte, Raleigh, Durham, you can get housing for a fraction of the cost. Your state income taxes are significantly lower. Schools if you're going to go private, cost a lot less. Public schools are significantly better. I mean there's just a very long list of reasons to move out of the California's and New Yorks and into those states. And we want to be there to capture that growth.

Got it. All right, so now I, most of this talk, I want to talk about kind of ultimately how it gets in front of investors. But I mean you may, you made it sound, I mean you told about, you know, about your whole vertically integrated company. You have all these different teams and that sort of thing. We've talked about the acquisitions company, I'm sure we talked about, you know, there's a marketing company aspect to your company and then once you take ownership of the property and you have your investors, like who else comes in in terms of a team to take it from there to ultimately kind of run this property. Like what are the other teams involved there?

Yeah, sure. So again, you know, as, as you and I both mentioned earlier, we're, we're fully vertically integrated. We'll outsource a little bit when we enter a new market. But then once we plant a flag in that market, a lot of the times we'll just bring everything in house.

And those advantages of that are, I mean we've talked about it a bunch of times. But like why do that instead of. I said there are a lot of other good companies to partner with, per.

Se property management companies versus going in house. It really just comes down to control and ability to drive a higher net operating income and keep costs down on capital expenditures. So all those things just create a higher IRR and more return, a much better process when we control the process end to end and have full visibility into the deal. So that's why we do it. It's really the best thing for the investors in the partnership.

Got it. Sorry to interrupt you. Are you going to say what goes on from there? Like what other teams take over?

Sure, sure. So once we take over, acquisitions hands it over to operations, accounting, and project management. The project management team executes on the CapEx plan. They'll assist the project management teams involved pretty significantly before we close because they're great at design also. So we'll figure out what kind of design we're going to be implementing, figuring out the cost. So we could put that into our model and into the business plan. And then as soon as we close, they take it over, they being project management and operations, and they start to execute on the business plan. And, you know, that usually takes the full renovation plan usually takes about 18 to 24 months. And then from there it's just operations.

Got it. And then when you ultimately go to sell, like, how do you. How do you get the sense that this is the right time to exit? It's kind of a loaded question, I'm sure.

Yeah, it's. You know, none of us really have a crystal ball, so we just do our best. Look, I can give you the mea culpa of all mea culpas. We exited Sacramento in about 2016, 2017, right before it took off and became arguably the hottest market in the nation. I mean, Sacramento, Phoenix, Vegas, those were some of the hottest markets in the nation. And we missed the boat. There was one property we sold for 15 and a half million and we did phenomenally well on it, but today it's worth around 32 million. So we missed that boat. And Sacramento has historically been a very volatile market and we wanted to avoid future volatility. So we thought, okay, let's sell now. Let's take our chips off the table. But the market just kept growing. Look, the good news is we exchanged and we got into the East Bay. Right, because the investment thesis there was people can't afford San Francisco or Silicon Valley, they're going to come across the bridge over to the East Bay. And we bought a lot of properties in the East Bay. We scaled and we did very, very well. Our investors did great in the East Bay. So those are two sides of the sword.

Got it. So I guess it sounds like there's no crystal ball. Somebody comes to a decision, this is a good time, take shifts off the table. I'm sure there's a good amount of discussion that happens there before you exit and then your investors are excited at the end of the day.

Sometimes you nail it, sometimes you don't.

Yeah, yeah. I mean, what do you think about this market today then? I'm just curious. Like, you've talked about investment thesis and that sort of thing, and I think people will be curious Right now, like when you're actually putting out deals right now, in terms of expectations that you're setting, like, what do you. What are you hoping for as a company, you know, to actually get for your investors? It's not exact numbers, but with the expectation of, like, you know, this market cycle, what is that going to look like? And what should people be kind of looking for in investments?

Good question. I would be looking at high growth markets. We're expecting a lot of rent growth. The money supply in the system is the highest it's been in many, many decades. We're expecting that to translate into rent growth. We're expecting it to happen nationally, and we are expanding nationally, and we're expecting to capture that growth in some of the markets I mentioned earlier in the Southeast, and we think it's going to happen on the west coast as well. Some of these states on the west coast were some of the last lockdown states. And as those markets start to recover and those economies start to open up, I mean, we're in California, you and I are in California as we sit here today, and you still can't go to a restaurant and get a table for seven people. So as these rules and regs start to change then, and we get fully back to normal, the California and Oregon markets and Washington markets will to really start to recover and get some really, really good growth. So we think with the COVID economic recovery, plus all the monies swirling around in the system, that there's just going to be tremendous opportunity in the multifamily market in the coming cycle.

Well, Max, I mean, thanks for this talk. I mean, this has been super helpful because I think so many people, including myself, we always wonder what happens behind the great doors that you have and all those people that are involved. I mean, I think we talk a lot about, especially on my site, we talk a lot about leverage, you know, leveraging, you know, other companies, Time Capital, Team Connections Network. And I think, like, you know, as a company like Tron Properties is a great example of that. Right. That you're able to leverage. When we invest like an investor invest with you, they're able to leverage all of that in their investment is what it sounds like. So, anyways, I want to thanks for. Thank you for this time. I mean, congrats on your amazing success. Let's have you back soon. I have a lot more things I want to ask you about. And take care and good luck with the move.

Thank you for your time. Yeah. Look forward to coming back soon.

All right, thanks, Max.

See you in Miami.

All right.

Bye.

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