Agents Building Cashflow

EP 150: From Fixer-Uppers to Fortune with Mark Khuri

• Mark Khuri

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Avid real estate investor and Co-Founder of SMK Capital Management, Mark Khuri shares his journey from being a financial analyst to becoming a successful real estate investor, detailing how he and his family started investing in single-family homes and small multifamily properties. He discusses the evolution of their business model from hands-on operations to becoming capital allocators, emphasizing the importance of cash flow, risk management, and diversification in real estate investments.

Mark also explains their strategic focus on mobile home parks, self-storage, and tax-advantaged multifamily properties. To learn the secrets behind Mark's success and gain valuable insights into smart real estate investing, tune into this enlightening episode.

Key takeaways to listen to:

  • The importance of cash flow, risk management, and diversification in real estate investing.
  • Why they decided to strategically shift from hands-on operations to capital allocation.
  • Exploring the benefits of investing in mobile home parks and self-storage units.
  • Discovering the advantages of tax-advantaged multifamily properties.
  • How to raise capital and build a successful investment portfolio.

About Mark Khuri

Mark Khuri co-founded SMK Capital Management in 2010. SMK is a boutique private equity real estate investment firm focusing on recession resistant investment opportunities. Mark has been an avid real estate investor for over 18 years and analyzed thousands of investment opportunities and has successfully bought, renovated, sold and invested in over 120 properties with a combined value over $1.5 billion and created and managed over 65 real estate partnerships with investors.

Connect with Mark Khuri:

To connect with Randal and learn more about passive investing, visit www.ridgelineig.com and follow our social media pages below!

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To connect with Randal and learn more about passive investing, visit www.ridgelineig.com and follow our social media pages below!

[00:00:00] Mark Khuri: For somebody new that's starting out, we always look at kind of 4 things average cash flow. And what is it in year 1, the IRR we want to see the internal rate of return that we're going to earn the internal rate of return is very sensitive to time. And if you have a shorter duration investment, the IRR will be higher.

[00:00:18] Mark Khuri: Then a longer duration investment. So it doesn't paint the full picture. So we also look at equity multiple. How much are we getting as a return on our investment? 

[00:00:28] Intro: If you're a real estate agent earning 200, 000 a year, and you want to grow your passive income, this show is for you learn secrets, other agents use, and hear from experts in our field who will guide you on your journey to investing in assets like apartment communities, so you can take your commissions and turn them into cashflow.

[00:00:47] Intro: Here's your host. Randall, let's dive in. 

[00:00:50] Randal McLeaird: Hey, welcome back. Today's guest is Mark Curry. We are going to discuss funds and we talk about his company. S K capital management and all the different [00:01:00] asset classes that they have invested in, how they have morphed from being an operator in the space into being a true capital allocator and finding and sourcing the best sponsors for a myriad of different asset classes.

[00:01:11] Randal McLeaird: And operators from around the country. So it's a really good conversation. If you're interested in how funds work and capital allocation, that is definitely a show for you. Mark has got a ton of information on it. So hope you enjoy the conversation as much as I have. If you're getting value out of the show, please go on rate and review helps us a ton with the reach of the show and bringing on guests just like Mark.

[00:01:29] Randal McLeaird: All right, let's jump in with the conversation. Here we go. Yeah, let's kick it off and talk how you got into it, essentially, like your dad was buying and then what really got you, because again, from that timeline that you have on your website, it looks like you guys were buying some single family, doing some of that fix and flip, and then you had an investor base that you're working with, and you guys transitioned and pivoted that into basically capital allocators.

[00:01:48] Randal McLeaird: Yeah. 

[00:01:48] Mark Khuri: Pretty much. Yeah. So to add some more context, Randall, basically, I went to school for finance. I was a financial analyst and did internal auditing budgets and planning and worked in corporate [00:02:00] America for eight years, really, before starting our company during that time. I started investing on the side, right?

[00:02:06] Mark Khuri: Very active by your 1st place, move into it, house hack, get a roommate, that kind of thing. That was pre recession. So 2004, five ish by 2008, nine, of course, a lot of things had changed and we saw some opportunity there as a family. We started pulling our capital together. My brother is my parents and myself, we were buying foreclosures, short sales in Florida and California where we were both located at the time.

[00:02:33] Mark Khuri: My father and I. And a lot of fixer uppers boarded up houses. Apartments, you name it usually 12 units or less. Again, all working while working full time. And every day after work, I'd be going to Home Depot and I'd be meeting contractors and managing tenants and you name it everything in between.

[00:02:49] Mark Khuri: And then a couple of years later, I ended up leaving corporate America and started our company, which is SMK Capital Management. That's my father and I's initials. Really wanting to [00:03:00] just expand on what we're already doing as a family by bringing in outside capital from, friends and colleagues at the time.

[00:03:07] Mark Khuri: We ended up, my first kind of pitch, if you want to call it, we invited folks over to our house and had a PowerPoint presentation and a little business plan and some food and drinks, of course. And 400 grand, which is pretty darn good. If you think about it during that time period, but we didn't really think that.

[00:03:28] Mark Khuri: There'll be so much hesitation. So that was a pretty interesting wake up call to the reality of how things work. And it's not just trust, the market and the returns and all of that. And so 

[00:03:39] Randal McLeaird: what year was that? Sorry to cut you off, but no, that's 

[00:03:41] Mark Khuri: okay. That was 2010. 

[00:03:43] Randal McLeaird: Okay. Okay. 

[00:03:44] Mark Khuri: So the market was upside down, there was fear everywhere.

[00:03:47] Mark Khuri: And so that definitely was part of it, but that's how we got our start to raising capital outside of the family. I also became a real estate agent and a licensed broker for a short while, just to really, get transactional [00:04:00] activity and experience. And also access to the MLS because we were buying a lot of fix and flips and we're trying to find deals.

[00:04:07] Mark Khuri: And but I never loved that side of the business. I did represent some clients a few times, but it was really more for our own investment business purposes. But then for the next 7 years Randall, 2010 to 2017, we were a sponsor operating partner where we source deals and. Acquired them, renovated them, sold them, rented, hold it, depending on the portfolio.

[00:04:30] Mark Khuri: About 60 properties, again, predominantly single family, small multifamily across multiple states. We expanded to the Midwest. And we did everything from, financing the properties to picking the paint color to, screening tenants all in house with a team we had built. So that was a big portion of our business for many years.

[00:04:50] Mark Khuri: But at the same time, I had left corporate America. I had a 401k sitting idle. Yeah, you can't invest in your own deals, of course. And so [00:05:00] just trying to find a place to invest those dollars. So I started networking my butt off. This was in Southern California at the time and looking for deals, right?

[00:05:08] Mark Khuri: Where can I invest passively as a limited partner to earn, attractive cashflow and a growth. That worked for about 2 years and started investing in sectors that we didn't have much experience in, like mobile home parks and self storage and some larger, institutional quality, multifamily, 300 unit apartment buildings in Texas and did that for 5 years.

[00:05:32] Mark Khuri: We made over 25 investments as LPs, myself and some family members. And at the end of that period, we, basically had some pretty darn good data. We could compare and contrast different asset classes, different returns, different risk profiles. We invested again in over geez, 10, maybe 12 different sectors within real estate.

[00:05:54] Mark Khuri: During that period, it was really a a very important part of our background, [00:06:00] which helped us. Land where we are today and determining what asset classes and then what regions and this kind of more thought process of our investment criteria today of what we invest in. To bring a full circle by 2017, we stopped being a sponsor and operating partner.

[00:06:16] Mark Khuri: For various reasons, essentially, one of the big ones was we wanted to diversify our capital outside of just single family and small multifamily, which historically, a lot of those properties have been correlated to the economy, right? So if you look back for the recession in 2008, 9, single family house values dropped significantly, and we had thought that by 2017 or so that there's probably a recession coming soon.

[00:06:42] Mark Khuri: And there were some indicators in the marketplace. That we felt things are going to change and we wanted to better position our, ours and our investors capital for more resilience, recession resistance is what we talk about a lot in our firm. And so we started utilizing some of our relationships with the other operators and sponsors [00:07:00] that we had personally been investing with for a number of years to access more deals, private investments.

[00:07:06] Mark Khuri: And started syndicating. We shared some opportunities with our investor group. Hey, we've been doing, mobile home park investing for the last 5 years. Here's what we found as returns and risk and summarized it. Do you guys want to participate? And almost all of them said, yeah, let's do it. And so it's how we pivoted.

[00:07:22] Mark Khuri: That was about 7 years ago now, and we've been focusing really as a private equity, real estate investment firm since. We've partnered with sponsors and operators on specific deals and really just trying to, again, diversify. We create multi asset funds, which are unique to just our company, where we will combine multiple deals and sponsors that we want to invest with into 1 investment fund.

[00:07:50] Mark Khuri: So people, investors can get immediate diversification versus investing in just a single asset at 1, 2, 3, Main Street. We do that as well, but we like to [00:08:00] do both. A 

[00:08:00] Randal McLeaird: lot to unpack. Thank you for that recap, because so many things in there that I want to break down. Let's go back. And then, so you guys, you started, you were investing even at single family and in small multis in multiple markets.

[00:08:12] Randal McLeaird: So how did you determine the markets? Was it just because you were based one and was it your dad was based in the other? 

[00:08:18] Mark Khuri: Sure. So my folks were in Florida and myself and my brother were in Southern California. And so we started investing in our backyard initially. Yeah. Yes. And then from there, we started looking at other markets for cash flow.

[00:08:30] Mark Khuri: It's always been a big part of our investment goals and it still is today. Where can we earn cash flow back then? We also fixed and flipped. We weren't just looking for cash flow, but we eventually migrated a bit to the Midwest, different regions of the Midwest to be able to buy homes and smaller multifamily that we could renovate and rent and hold and earn a nice cash flow.

[00:08:51] Mark Khuri: Coupon from doing that. 

[00:08:53] Randal McLeaird: All right. High level. Then if anyone's looking to invest outside of their current market, because you did it, what are some tips [00:09:00] looking back that you would say do it or don't do it? Broke on, just a few points there. 

[00:09:05] Mark Khuri: Totally. I'd say stay away from really old homes and properties, really old to me is anything over 40, 50 years.

[00:09:12] Randal McLeaird: Yeah. 

[00:09:12] Mark Khuri: They just have a slew more of unexpected maintenance and repairs that will come up. Even if you renovate the heck out of trust me, there's always something number 2, I'd stay away from homes less than 100, 000 dollars. Okay. There's just a. Totally different ball game in that space and you tend to find that the operating expenses are much higher turnover, et cetera, et cetera.

[00:09:37] Mark Khuri: Yeah, that's not everywhere. These are just some general rules, but, the older stuff and I would say that the real cheap stuff you want to stay away from. 

[00:09:44] Randal McLeaird: Yeah. Good points. Good points. Just Tenant class or yeah. Yeah. The clientele, I guess that you have maybe tougher on the property. 

[00:09:52] Mark Khuri: Yeah, I'm 

[00:09:52] Randal McLeaird: guessing.

[00:09:52] Randal McLeaird: Yeah. Yeah, 

[00:09:53] Mark Khuri: totally. 

[00:09:54] Randal McLeaird: I agree. I've experienced that firsthand. So a lot of sub 100, 000 properties I've bought in San Antonio. I was like, [00:10:00] nah, just cause you can't doesn't mean you should. Yeah. Get the nicer things and it's a lot less headache. Okay. And then you talked about. The search that you guys went on the networking that you went through in order to source sponsors for you to invest with.

[00:10:13] Randal McLeaird: And if again, can high level some of the learnings that you received, from going through that process that may help somebody else that's looking for a sponsor to invest with in a limited partner capacity. 

[00:10:24] Mark Khuri: Yeah, I think number 1, which remains today is experience is extremely valuable. Even today, we tend to not invest with sponsors or operators that have less than.

[00:10:35] Mark Khuri: Five, even 10 years of direct investment experience in their specific niche. We're usually looking for folks that have groups that have over 500 million in assets under management, built out teams, acquisition team, asset management teams, back office for accounting, the tiny little operators have some value of course, but for longevity and.

[00:10:57] Mark Khuri: But I'd say securing your investment in case [00:11:00] something happens to some of the key principles, you want to look for a larger firm where they can continue operations and not have a major disruption because one or two people are no longer around for whatever reason. Those are some of the first things that, try and find folks that just wow you in all different aspects.

[00:11:16] Mark Khuri: Number one, communication. When you reach out to them and speak to them, are they ready, willing, and able with their time to share? Even if you're a beginner and brand new at this. Are they transparent with their hurdles that they've gone through or is everything always been perfect. And so if that's the case, be careful, because that's never true and how transparent are they to your questions, providing data, providing analysis on what's gone and what hasn't and what they've learned over the years.

[00:11:41] Mark Khuri: And those are some of the things you're looking for, and you're working with people. So try and find the right people that you want to be with for the next 10 plus years, not just do 1 deal. 

[00:11:52] Randal McLeaird: Yeah, for sure. Great advice. And to that point, though, you had to make that transition. So if somebody is looking to get into the field, [00:12:00] you started with syndications on your own deals, correct?

[00:12:03] Randal McLeaird: Or were you using your own capital on those first deals to get that experience? All of the 

[00:12:06] Mark Khuri: above. Yeah. We used our own capital on the first five years, and then we started using our own capital plus other investors capital as well. 

[00:12:13] Randal McLeaird: Okay. So yeah, tips for anyone looking to do the sponsor side. And actually run their own projects again, is it using your own capital to get that five year experience and then start going and looking for capital from other people?

[00:12:25] Mark Khuri: Pretty much. I would say if you want to be a sponsor and operator, and you want to start out in that space, if you're not going to partner with others that already have been doing it successfully for a number of years, and you're going to start fresh, where are you going to start? You're gonna start with your own money, a hundred percent.

[00:12:39] Mark Khuri: And if you can bring in some family and friends that already trust you, build out a portfolio, prove that you know what you're doing. There's tons of new groups out there starting syndication and operation firms that the options for investors is unlimited, honestly. And so what makes you different, right?

[00:12:58] Mark Khuri: Find out what your sweet [00:13:00] spot is. Is there, I know this market in and out. We already own five, 10 properties within a mile. I know the comps, I know the demand, what's the special sauce, right? All of them need parking. This one doesn't have it. We're going to build a garage and people will pay, there's so many different Nuances that what makes your deal special and you special that stands out from the crowd.

[00:13:21] Randal McLeaird: Great advice. The other thing that, that fascinates me, just researching what you guys are working on the way you're doing, because you morphed from a. The operator, then operation side tend to capital allocators where you guys are now picking deals, picking winners. And so you mentioned something about the risk profile and having invested in so many different types of asset classes.

[00:13:40] Randal McLeaird: Let's talk about risk profile in certain asset classes and why you guys are now dedicated to what you're dedicated to. Does that make sense? Yeah, 

[00:13:48] Mark Khuri: that makes great sense. Totally. I think what's important to note is what is our investment criteria and what do we need to achieve for a deal to even be looked at?

[00:13:57] Mark Khuri: And I'll share that 1st, because then there's so many other deals that [00:14:00] won't fit in this ball and this basic criteria that we have, and it helps distinguish between what we will and what we won't do. To start with that, We're looking for investments that can provide our investors with 3 to 7 percent cash flow in year 1, starting day 1, but then while we're increasing the value and improving operations and increasing that operating income, we're looking for an average cash on cash return net to our investors of 7 to 12%.

[00:14:26] Mark Khuri: That's annual while we're holding. And then when we sell the property, we're looking for a total return of. Typically it's, we'll say 13 to 20%. Depending on the duration, depending on the strategy, the project, et cetera, but essentially, most of our deals are 15 plus average annual ROI.

[00:14:46] Mark Khuri: We've had 16, I would say commercial real estate syndication exits over the years. And the average on those I think is like 22, 23%. And so we're quite proud of that. But you also want to look [00:15:00] at like equity multiple, right? This is where some of the metrics in the math can get a little bit confusing.

[00:15:05] Mark Khuri: But for somebody new that's starting out, we always look at kind of 4 things. Average cash flow. And what is it in year 1? The IRR, we want to see the internal rate of return that we're going to earn. The internal rate of return is very sensitive to time. And so if you have a shorter duration investment, the IRR will be higher than a longer duration investment.

[00:15:27] Mark Khuri: So it doesn't paint the full picture. We also look at equity multiple. How much are we getting as a return on our investment? If you put in 50, 000 and you get back 100, 000, your equity multiple is 2. And so the IRR could be high on a short investment, but the equity multiple might be lower. So you want to look at that.

[00:15:46] Mark Khuri: So we also look at average annual ROI, which doesn't take into account necessarily the speed or frequency of the distributions, but it looks at the total return, including distributions and profit, and then also the [00:16:00] number of years that you're invested in. And so those are the four main metrics that we always look at for every deal.

[00:16:05] Mark Khuri: Helps us determine, where the risk lies. And I'll give you 1 thing. We see a lot of lately we see attractive equity multiples. We see attractive average annual ROI. But then you look at the average cash flow and it's pretty darn low, Randall, right? Yeah, 5, 6%. What does that tell you? It tells you right away that most of the return on that deal is coming at the back end when you sell it.

[00:16:28] Mark Khuri: So there's a lot of work that has to be done in order to get that return. If you have a higher cash flow average and starting in year one, and you're still getting the same overall return, then there's less work to be done. There's less risk. And so that's really how we look at deals as far as risk and return from just a performance and financial return standpoint, as far as specifics on what kind of deals we like to invest in and those that we won't because of risk and return, we've narrowed it down over [00:17:00] the years.

[00:17:00] Mark Khuri: We have a handful of asset classes that we love to invest in. The 1st, 1 I'll mention is mobile home parks. Lots of reasons we can get into each 1, but let me tell you what they are 1st mobile home parks, self storage. Some apartments in this market, it's quite difficult to make apartments pencil, but there's specific niches within apartments that we love to invest in.

[00:17:20] Mark Khuri: We do some triple net sale lease back industrial. We've been investing in ATMs for 5 years. We also invest in private real estate debt funds. And so I think that's probably a pretty good start of what we're focusing on today. What we don't do, we don't do development deals, ground up construction. We don't do senior housing.

[00:17:44] Mark Khuri: We don't do student housing. We don't do vacant land plays. We don't do short term notes, borrowing, lodging, hospitality, malls. We stay away from all that. 

[00:17:58] Randal McLeaird: Okay. Awesome. So had you [00:18:00] ever invested in some of those and you had the experience and you're like, Oh man, this is awful. So now I'm only going to stick with mobile parts.

[00:18:06] Mark Khuri: Yeah. We've invested in all the things I mentioned. Plus we've invested in oil fields in Texas. And so we've tried a lot of things over the years, Randall. And they're not all bad. It's not that we think, oh, you should never do this. That isn't the point. There's some great senior housing deals. There's some great student housing deals.

[00:18:21] Mark Khuri: Why don't we do them? Most of the time, we just don't see the reward for what we see as an added risk. And so why take on more risk if you're not going to get a better return? That's just the way we look at it. And all those asset classes, in our view, generally speaking, tend to have more risk. For relatively the same return or sometimes less than what we're getting in the asset classes that we focus on.

[00:18:45] Mark Khuri: Where we believe there's less risk. 

[00:18:47] Randal McLeaird: So on, let's just take senior, where's the risk in a senior housing deal? 

[00:18:52] Mark Khuri: Yeah. So typically you'll see operating expenses much higher. 

[00:18:56] Randal McLeaird: Yeah. Okay. Yeah. 

[00:18:58] Mark Khuri: Other asset classes [00:19:00] staffing, compliance, you name it, depending on the type of senior housing, assisted living, all the memory care.

[00:19:05] Mark Khuri: There's like different segments within there, but usually your breakeven point is. A lot more, I would say, susceptive to regular fluctuations in the market, staffing, so to put it in perspective to a single family home rental, usually your operating expense ratios are, it could be anywhere from 70 to 80, 90 percent of your income.

[00:19:27] Mark Khuri: It's really high. Yeah. So if something goes wrong, boom, your cash flow is gone. And versus a mobile home park where the tenants own the homes, your operating expense ratio, it could be 30%. Same with self storage. So a lot more has to go wrong for you to not break even. And so that's how we look at it from a risk standpoint.

[00:19:46] Randal McLeaird: Awesome. Okay. A lot of things that you guys are doing. And when I first started looking into funds and launching funds and that sort of thing, that pretty much the strategy that you guys. Do is what appealed to me the most, which is find [00:20:00] operators who are exceptional at what they do, raise capital, put money into their deals, right?

[00:20:04] Randal McLeaird: And so that's what you guys have done. I like that you have diversified across multiple assets and asset classes within the fund as well, because then it's not just the operator diversification, it's. The type of asset diversification. So let's talk funds and how you guys structured it. So the first one I know of that I think you guys started was the recession resistant fund.

[00:20:25] Randal McLeaird: Was that your first one? 

[00:20:27] Mark Khuri: No, the first fund we ever created was in 2010 Randall. Oh, 

[00:20:30] Randal McLeaird: really? All right. Let's go 

[00:20:31] Mark Khuri: creating funds for a long time. And for us, like what's the definition of a fund. It's really when you combine multiple properties into one investment offering. 

[00:20:41] Randal McLeaird: Yeah. 

[00:20:41] Mark Khuri: Let's keep it simple. That's probably the simplest definition versus.

[00:20:45] Mark Khuri: Just 1 property that you're investing into. 

[00:20:48] Randal McLeaird: What was the 2010? What were you at? Was it for single family? 

[00:20:51] Mark Khuri: Oh, gosh. Yeah. That was a blind pool fund in 2010. so if you're not familiar with the term basically means we have this concept. We're going to go out and do this. This [00:21:00] create this fund, but we had not yet identified any of the assets.

[00:21:03] Mark Khuri: And it's also probably why our first raise didn't go extremely well, but we learned pretty quickly that, it's probably good to identify the first few assets at least. And so a blind pool funds are a little more difficult to get into to start as an investor. You're just relying a hundred percent on the manager to be able to go out and source deals and make sure that they're actually going to be able to build the fund.

[00:21:25] Mark Khuri: There's more risk at the beginning of that fund for a Investor so that was the 1st, 1 that we went out and did, and we ended up purchasing several properties in California and Florida and putting them together into a fund 

[00:21:36] Randal McLeaird: with a single family. Were they multifamily? What can I ask? That's where you 1st, what was the thesis there?

[00:21:40] Mark Khuri: Yeah, it's a little bit of both. We had duplexes. I think there's a 4 plex and 3 single families. Okay, 

[00:21:46] Randal McLeaird: and the whole idea was just keep them as rentals and cash flow them and pay investors back instead of paying a bank. Okay. 

[00:21:51] Mark Khuri: That was a big part of it. I think there was one property or two. I don't recall exactly Vandal that we were going to flip as well.

[00:21:58] Randal McLeaird: Okay. Yeah. Making you [00:22:00] dig deep, man. I wanted to, 

[00:22:01] Mark Khuri: I love it. Yeah. I 

[00:22:02] Randal McLeaird: didn't know that was your first one. When I was doing the research, I thought it was this recession resistance. So you'd been working it and raising capital. So from 2010, that makes sense. Again, you went through the process of sponsoring those deals, raising capital, doing syndications on your own.

[00:22:17] Randal McLeaird: What's the major difference now in your day to day compared to when you were operating the deal, right? You are underwriting deals still. You are, and we'll talk deal flow and all that in just a minute, but compared to syndicating and operating where you're running the management company and you're making sure all that's happening, now what are you guys mostly doing?

[00:22:36] Mark Khuri: Yeah, so what we're really not focusing much on, which are operating partners focus on is managing property managers and contractors. So that's a big difference between what we did actively versus more on the passive side from just being more in the private equity. See, so we're relying on our sponsors and operators to execute on the business plan.

[00:22:55] Randal McLeaird: Yeah, 

[00:22:55] Mark Khuri: that's why we partner with them. They should be better at it than us. That's why you do it. What do we [00:23:00] focus on? There's largely I spend. Every day, I'm looking at deals and opportunities. We're constantly trying to see where the market is going to go and where it's been and where we think to best position our capital.

[00:23:12] Mark Khuri: That's been, day in day out for over 10 years for us. And a big part of it is talking with our operators and sponsors. And seeing what they're seeing on the ground, how many LOIs are they have under contract right now with sellers? How many different deals have they been looking at in the last quarter or last month?

[00:23:31] Mark Khuri: Is deal flow up? Is it down, what kind of discounts are you getting from peak values in 2021 and 2022? What are the cap rates? What are the borrowing rates? It's really trying to understand where's the market. And we do that all the time to figure out. Where the best position for our money is right.

[00:23:47] Mark Khuri: And so it's a big part of it, Randall. And then, of course, there's the mechanics of what we do on a day to day basis of raising capital, managing a couple dozen entities with investors in them investor statements, investor [00:24:00] distributions, updates, quarterly reports, and then all the accounting and bookkeeping that's done by our team as well.

[00:24:05] Mark Khuri: And K ones and, all of that in between. 

[00:24:08] Randal McLeaird: Yeah. Is there a a portion of deal flow you guys provide to sponsors if something comes across your desk or is it mainly the other direction where they're like, Hey, we package this deal together and come in and which way is that because you're an operator in the field?

[00:24:22] Randal McLeaird: I don't know if you guys are still getting deal flow direct to you. 

[00:24:25] Mark Khuri: We typically tend to avoid deal flow that and it comes to us to hey, I got this deal. If you guys want to buy it and the answer is usually no. Yeah. And so what we're typically doing, we're looking at 10 to 20 investments a month, sometimes more.

[00:24:41] Mark Khuri: And we invest in 5 to 10 a year. So I have 97, 98 percent of the stuff we see. We just say no to for a lot of reasons, but we're very particular with what we want to invest in when it comes across. Great. Let's go underwrite and do a bunch of due diligence. Even then a lot of them don't get through, but that's a big part of every day is trying to seek [00:25:00] out another investment.

[00:25:01] Mark Khuri: We'll go, 7, 8 months without doing anything. Randall, if there is no and nothing that meets our investment criteria. So that's a big part of it. Most of our deals come to us like this, where it's an email, it's a phone call. It's a text. Hey, Mark, we've got a live one. Are you, your family or company interested?

[00:25:18] Mark Khuri: Here's our initial one pager and some financial pro forma model. Let us know what you think. That's how most of our deals come to us. It's many of them are just private real estate investments. You're not going to find online. It's just connections and relationships. 

[00:25:32] Randal McLeaird: Yeah. How heavy are you in the ATM side compared to the real estate side?

[00:25:37] Mark Khuri: Yeah, we've been investing in ATMs for five years. We still invest in them. It's definitely a portion of the portfolio. We find it to be lucrative for certain folks. ATMs are essentially what we consider to be a fixed income investment. There's no growth. The actual machines depreciate in value because you're investing in equipment.[00:26:00] 

[00:26:00] Mark Khuri: So after the investment life cycle, which is typically seven years, it's not like real estate when you. When you sell something after seven years in real estate, you're hopeful that you're going to get a lot more money back than what you put in. With ATMs, there's really nothing left. And so you don't even get your principal back.

[00:26:17] Mark Khuri: And so some people have a hard time stomaching. Why would you invest in a depreciating asset? But what's the point? The point is the cashflow and the income. And so it's one of the highest cash flowing investments that we've came across in 20 years. We offset the valuation depreciation with the income.

[00:26:37] Mark Khuri: What's the power of income, right? It's all about compounding our return round. All right. If you take, for example, 100, 000 dollars, you put it into an apartment deal today. You might get 3, dollars in cash flow the 1st year or 2. Hopefully higher, but then put that back to work into something else, right?

[00:26:54] Mark Khuri: By reinvesting your dividend, you can compound your initial 100, 000 investment [00:27:00] pretty significantly. But in apartments or these kinds of real estate deals, it's just not that much cash flow. There's only so much you can do with 5, 000 and reinvested each year. Whereas ATMs, they typically will produce 20 to 25 percent cash flow each year.

[00:27:15] Mark Khuri: So now you've got 20, 25, 000. It's, four or five X what you could get in real estate. So if you do the math and you do that every year and you reinvest some or all of the distribution money from ATMs into something else. The return on your initial a hundred K just goes through the roof. And so that's a big part of why we do it.

[00:27:33] Randal McLeaird: Yeah. That's high cashflow. I met some other operators who, I don't know if they, I don't think they operated the ATMs. Maybe they did, but they were telling me about it. Is that some conference I was like, yeah, this is crazy. This is a high. Yeah. And so typically if you have an investor come into one of your funds, and I was looking at the returns on your website, it's okay, you guys have bulked up on the number of ATMs and servers on your fund three.

[00:27:54] Randal McLeaird: It looked like there was a ton of them. So what are some examples of you're taking that cashflow? And just so I [00:28:00] understand this, I put a hundred thousand dollars in say it's 20%. I'm getting 20, 000 per year. And then you exit in year seven, essentially, but you don't exit. It's just closes down or what happens in year seven?

[00:28:09] Randal McLeaird: Yeah. 

[00:28:10] Mark Khuri: The machines are typically sold for spare parts, but they're just not worth much, right? An ATM, once you retrofit it, Could cost, 17 to 20, 000 up front after seven years, it's probably worth less than a thousand bucks. 

[00:28:24] Randal McLeaird: Okay. 

[00:28:24] Mark Khuri: It really does depreciate significantly. It's a really old laptop, just doesn't work the same as it did when you first got it.

[00:28:29] Randal McLeaird: Okay. So there's always turnover and those on a cycle of about seven years. And so you invest again, just so I know the numbers I put a hundred thousand and I get 140 back total and cash flows. If it's 20 percent per year. 

[00:28:41] Mark Khuri: So yeah, 140 on top of the a hundred give or take. Yep. That's it. So I'll get 

[00:28:45] Randal McLeaird: my initial principle back for some reason.

[00:28:47] Randal McLeaird: I thought you said that you get 

[00:28:48] Mark Khuri: it back in theory, Randall, right? It's not like in real estate where you get it back at the end and we sell, and here's your money back. 

[00:28:55] Randal McLeaird: If 

[00:28:55] Mark Khuri: you think about it from this standpoint, what's the break even period. So it's [00:29:00] around four, four and a half years or so you would have gotten enough cashflow to at least make your risk zero at that point.

[00:29:07] Mark Khuri: Cause you've got all your money back. Then you got another two and a half, give or take years of. What you call profit. So you can look at it that way, but it's just a steady stream of income that continues from day one to tier seven. 

[00:29:19] Randal McLeaird: Okay. We don't have to spend a ton of time on ATMs. It just, it's fascinating to me, right?

[00:29:22] Randal McLeaird: I'm still curious. So you're getting most of the depreciation year one. So if I put a hundred in, I get 80, 000 depreciation, give or take. Is that based on bonus depreciation or is that just how much you can depreciate that ATM? 

[00:29:34] Mark Khuri: No, you nailed it. Bonus depreciation. So a couple of years ago, we were getting a hundred percent in year one.

[00:29:40] Mark Khuri: You get a large passive loss, and then it stepped down to 80 percent last year. And now we're currently at 60 percent 2024, but there's. Most likely going to be a change where they increase it back up again. We'll see. 

[00:29:53] Randal McLeaird: Yeah. Yeah. 

[00:29:54] Mark Khuri: Everything we do, Randall has a large passive loss in year 1. Honestly, that's a big part of our strategy, like [00:30:00] mobile home parks and tax exempt apartments.

[00:30:02] Mark Khuri: If you want to talk about those, we get sometimes over 100 percent passive loss in year 1. So ATMs are great. Other asset classes are also great for tax advantage structure. 

[00:30:12] Randal McLeaird: Yeah. So what is your favorite right now in this market? What are you doing? 

[00:30:19] Mark Khuri: Yeah. 

[00:30:20] Randal McLeaird: You had the pick of the letter. What are you going to, 

[00:30:22] Mark Khuri: I think it's probably a tie between mobile home parks and tax exempt departments.

[00:30:28] Randal McLeaird: All right. 

[00:30:29] Mark Khuri: ATMs are great, but they don't have a large equity multiple. 

[00:30:33] Randal McLeaird: Okay, 

[00:30:34] Mark Khuri: so you're getting cash flow in order to get the higher equity multiple. You got to reinvest a lot of the cash flow into something else, but it's still a pretty good strategy. But yeah, tax exempt departments and mobile home parks tend to be really where we, if I see a deal come across my desk, I'll stop what I'm doing and look at it immediately.

[00:30:50] Randal McLeaird: Okay. All right, good to know and before we talk about those, what's your investment horizon? Typically with SMK, are you guys looking for deals that are 10 plus [00:31:00] years? Are you looking for short term? I know you do so many different things. It could be varied from each asset class, but 

[00:31:06] Mark Khuri: most everything is 5 to 10 years.

[00:31:08] Mark Khuri: Okay? 

[00:31:09] Randal McLeaird: Yeah. Your capital is not short term capital. It's what I'm getting at, right? 

[00:31:12] Mark Khuri: No, we tend to stay away from short term deals in this market because there's so much uncertainty and volatility and a lot of shorter term deals tend to have shorter term debt and that can get you in trouble.

[00:31:23] Randal McLeaird: Yeah. What's the average check size you guys like to be into a deal? 

[00:31:26] Mark Khuri: Most time we're between 2 and 5 million per deal. 

[00:31:29] Randal McLeaird: Okay. And then do you guys get governance or are these deals large enough to where you're still just a small investor or like, how does that work? 

[00:31:37] Mark Khuri: Both just depends honestly, Randall, on the size of the deal, because we also will invest in portfolios, right?

[00:31:43] Mark Khuri: We've invested in a multifamily portfolio, 1. 8 billion dollars of value. And if we're putting a few million dollars into that, we're not getting any kind of control provision to governments. But if we're a larger piece of the equity, then yeah, we could definitely usually get that.

[00:31:58] Mark Khuri: It depends on the operating [00:32:00] partner and the relationship and all that. 

[00:32:02] Randal McLeaird: Again, before we get off this, getting the weeds here, I want to ask you. So when I started looking at this, how are you structuring a deal like that, where your fund is coming in a smaller piece of a 1. 8 billion? Is that what you said?

[00:32:14] Randal McLeaird: Okay. Smaller piece of that deal. Obviously that portfolio, either each individual deal or each individual property or the entire portfolio as a whole is projected to return X and they have fees and they have everything structured and they have waterfall structure and then you have your fund that has its own individual waterfall structure.

[00:32:33] Randal McLeaird: So how do you guys, do you try to match exactly what the actual sponsor has put together on the return profile to just pass through directly to your fund? Or how do you guys structure that? 

[00:32:45] Mark Khuri: Yeah, it depends, Randall. So for a single asset investment that we're going to invest into and not put into a fund that we manage and control, then we will oftentimes look to achieve more favorable terms from our sponsors.

[00:32:59] Mark Khuri: So [00:33:00] we almost always get that versus someone going direct. So you happen to know the sponsor and you want to go and do all the due diligence and you feel comfortable and want to invest directly with them. You can, but usually you're going to get a lower preferred return and a lower split.

[00:33:14] Mark Khuri: You may not get the same kind of reporting that we get detail financials, you name it, and the time of the sponsor and their team. And so that's a big part of what we also look for. It's not just numbers. It's communication and detail along the way. If there's a 5 to 7 year investment, and I can't have access to more information consistently than.

[00:33:37] Mark Khuri: That sometimes is a deterrent for us, but then what we'll do and in our entity is, we'll also look at the economics from what we're receiving from the deal. And we'll say, okay, what makes sense for our investors? What kind of preferred return should we give them plus the split? We'll typically take a 1 percent management fee on equity invested.

[00:33:56] Mark Khuri: So that really just. Helps with operating costs. It's not a [00:34:00] profit center and we really structure deals where. The better the performance of the deal, the more money that all of us will make, including SMK. And so that we believe it incentivizes us to really only pick great deals. Otherwise you're just not going to make any money.

[00:34:15] Mark Khuri: And so it tends to have to be a win if that makes sense. 

[00:34:17] Randal McLeaird: Yeah. So do you have a standing fund? Right now that you guys are operating for real estate, 

[00:34:23] Mark Khuri: we just closed 1 and we're hopefully going to open another 1 shortly. 

[00:34:27] Randal McLeaird: Okay. But so the 1 that's closed, it's fully deployed or just closed to new investors.

[00:34:32] Mark Khuri: It's fully deployed as of next week. We're writing checks next week. 

[00:34:36] Randal McLeaird: Okay. Again, that fund has its own waterfall structure. And then if it goes and invest in a deal where you're a small investor yeah, I don't know. It was just one of those things that always, I couldn't fully figure out, unless you're getting that deal structure with the sponsor where the sponsor says, okay, you're a bigger check.

[00:34:53] Randal McLeaird: You're going to come in. We'll give you a better prep. So then you, as the fund manager, that's where you're making the money on the, on the deal. [00:35:00] Cause you have a side letter agreement or something with that sponsor. 

[00:35:02] Mark Khuri: Yeah, totally. Yeah. Negotiating more favorable terms is a big part of what we do with our sponsors.

[00:35:07] Mark Khuri: It helps the economics net to our investors, right? So if a sponsor has just be transparent, if they have a very heavy fee load or a very high split in their favor, a lot of times it would just, we can't work with them. Yeah. What are 

[00:35:22] Randal McLeaird: you seeing right now then? What is the heavy fee load right now?

[00:35:25] Mark Khuri: I'll tell you about 1 that I saw recently that I just was like, am I reading this wrong? So there's a sponsor that does. A very interesting split, but I think it's every dollar that goes back to investor is a return of principle. 1st, and then once their capital account balance goes to zero, it's a 20 80 split, the investor gets 20 percent and the sponsor gets 80.

[00:35:50] Mark Khuri: That to me is just, I've never seen anything like that. That's really aggressive. 

[00:35:55] Randal McLeaird: Yeah. Yeah. So no preferred return. 

[00:35:57] Mark Khuri: I don't think so, even if there was a [00:36:00] preferred return, the way they have it structured with. And all dollars reducing your capital account balance, it's almost irrelevant in that case.

[00:36:07] Randal McLeaird: Yeah. Yeah. You're right. Yeah. Because you're, once the pref kicks in after your capital balance is zero, you're getting a 10 percent zero dollars. 

[00:36:16] Mark Khuri: Exactly. So that was a great, just to just, we don't see that is not normal, but typically what we'll see is You know, a 7 or 8 PREF plus 70 ish, 75 percent split to investors, 25, 30 percent to the sponsor.

[00:36:35] Randal McLeaird: Yeah. 

[00:36:35] Mark Khuri: We often like to, get up to 80. 

[00:36:38] Randal McLeaird: Yeah. That 

[00:36:39] Mark Khuri: makes sense. 20, sometimes 90, 10, just depends on the deal. 

[00:36:42] Randal McLeaird: Okay. All right. So again, I wanted to geek out on that for a minute. I love it. Because again, like talking about funds and how they're structured. So you mentioned mobile home parks and. Tax advantaged multifamily.

[00:36:55] Randal McLeaird: So mobile home park, I've had a lot of operators, not a lot, but I've had guys come on. [00:37:00] We've talked about mobile home parks. I know reading your site and you're like, we did not do this 1 deal because 70 percent of the homes were going to be owned by us. And we're going to be in the actual ownership business of homes or like the tenant management business.

[00:37:13] Randal McLeaird: When you look at mobile homes, and you're looking at operators, are you guys specific to a certain geography in the United States for mobile home parks? If so, why? 

[00:37:22] Mark Khuri: Great question. Generally speaking, we're market agnostic on mobile home parks. It depends on rent control laws. That's a big one for us.

[00:37:30] Mark Khuri: So we'll usually stay away from areas that have rent control because they're just unfriendly to landlords and can cause disruption in the cash flows and the growth I should say. But generally speaking, we love the Midwest. We love the South, Southeast, the Carolinas. There's a lot of opportunity in those regions and mobile homes.

[00:37:49] Randal McLeaird: Do you see that market getting more, I know it's become more institutionalized in the last few years. Do you see it becoming saturated or [00:38:00] municipalities limiting the new mobile home parks? And if so, how are you guys going to combat that? 

[00:38:05] Mark Khuri: So saturated right now, just. There's just a very, I would say we're in a very low spot of available inventory or deals for sale or investment opportunities in mobile home parks.

[00:38:18] Mark Khuri: It's 1 of the slowest times I've seen since coven. 

[00:38:21] Randal McLeaird: Okay, 

[00:38:21] Mark Khuri: because the numbers typically don't make sense. The seller wants X buyer wants why there's a 20 to 30 percent discrepancy. The deal is not getting done. A lot of that's due to high borrowing costs, of course, and sellers thinking that they're still in 2021, which we're not.

[00:38:37] Mark Khuri: And so when it comes to deal flow, it's quite low right now, like very low, Randall. I think that's picking up. We've started to see an uptick in the last month or two, which is great. The psychology in the marketplace seems to have improved where buyers and sellers are starting to shake hands more frequently and more transactions are getting done.

[00:38:56] Mark Khuri: Obviously, we don't think there's going to be any more interest rate hikes. Obviously, we're [00:39:00] waiting to see if the Fed will reduce interest rates. We don't know if and when, but it's likely that they will, most likely soon. When it comes to that and saturation, you're right to about mobile home parks.

[00:39:11] Mark Khuri: There's been a lot of institutional buyers. I'd say in the last 5, 6 years that have entered the space, but you still have an asset class where I don't know the exact number today. 80 to 90 percent of mobile home parks. Randall are owned by mom and pops 

[00:39:25] Randal McLeaird: still. Okay. 

[00:39:26] Mark Khuri: Yep. Okay. So even with institutions coming in, it's not to the point where they're taking over, 60 percent of the market share.

[00:39:33] Mark Khuri: That is not the case. 

[00:39:34] Randal McLeaird: Yeah. Yeah. Okay. That's good to know. And then I know we're getting to the end here. I wanted to ask you again, the other asset class, the tax advantaged multifamily high level, explain to us what that is and why you like it so much. 

[00:39:47] Mark Khuri: Yeah, it's a very niche asset class within multifamily where we're acquiring an existing asset, typically 90 percent plus occupied when we buy them, where we have in escrow, our sponsors will [00:40:00] put in place a property tax exemption.

[00:40:02] Mark Khuri: It's typically a partnership with the local municipality where we're going to keep 50 percent of the units at the property affordable by definition. It might have to lower rents. You have to restrict, who can actually rent those units, it's you're creating affordable housing by doing that.

[00:40:19] Mark Khuri: You get into a partnership with the city where they will give you a property tax exemption, or you don't have to pay property taxes for 99 years and that flows with the property. You can transfer title and also the next buyer can have that same tax exemption. Why do we like them? Property taxes are 1 of your largest, if not the largest expense item.

[00:40:40] Mark Khuri: If you can remove that. With certainty that it's going to stay away and not be charged for many years, you automatically start out with higher cash flow. Day 1, you reduce risk of property tax increases over the next, holding period of your investment, whatever that is. And it makes it more attractive to the next buyer.

[00:40:59] Mark Khuri: What you have to [00:41:00] make sure makes sense is if you need to lower the rents by how much, and is that deduction in revenue being greatly offset by the deduction and expenses, otherwise, why do it, you're just stepping on your own foot there and it doesn't help. 

[00:41:13] Randal McLeaird: Yeah. 

[00:41:14] Mark Khuri: We love them because there's lower risk and better return.

[00:41:17] Randal McLeaird: Cause I don't know, this was maybe five, six years ago. And our P was putting up a bunch of these P3, public private partnerships with the cities where they were setting them up that way. They're building affordable housing specific. So the developer themselves. They were putting that agreement in place.

[00:41:34] Randal McLeaird: So you're saying that you are able to buy an existing and take it. And so you guys go through all the regulation, all the paperwork, everything you have to do in order to get that tax exemption, 

[00:41:44] Mark Khuri: correct? Yeah. And you guys as our operating partners. So we work with a few operating partners that focus specifically in this niche.

[00:41:52] Mark Khuri: This is basically all they do. All day long. And they have a team of lawyers, they have a lobbyist. It's not a game for the newbies to be [00:42:00] trying. Yeah. Yeah. Sit side by side with the city's attorneys and your attorneys and figure it out. Yeah, 

[00:42:07] Randal McLeaird: that's incredible. Okay. So 99 years. I was going to say higher regulation, but again, you just answered that essentially the team of lawyers are working on that in the background so that you guys just have that as a deal.

[00:42:16] Randal McLeaird: So I didn't know you could do that after the fact. So that's interesting. 

[00:42:19] Mark Khuri: Yeah, you can do it. We'll acquire from a seller who don't have the tax exemption and then you put it in place while an escrow. 

[00:42:25] Randal McLeaird: Yeah. All right. Mark, we covered some ground here. Wealth of information. I appreciate you jumping on, sharing your background, your story, talking about your business and what you guys are working on.

[00:42:35] Randal McLeaird: I'm going to put all your info in the show notes. If you're looking for an investment opportunity, I would definitely reach out to Mark and keep track of what they're working on. It looked like you were in the process, maybe getting close to launching a new fund or two. So there will be some investment opportunities there in the future.

[00:42:49] Randal McLeaird: So yeah, again, appreciate you jumping on and and sharing your info. 

[00:42:53] Mark Khuri: Yeah. Thanks for having Randall. It was fun. 

[00:42:55] Randal McLeaird: All right. No problem. Catch you guys in the next episode. Did you know that 80 percent of the agents we speak with [00:43:00] got into real estate in order to gain passive income so they could obtain financial freedom and become work optional.

[00:43:05] Randal McLeaird: If you want to stay up to date, the best way is to make sure you're subscribed. So if you haven't done that, go ahead and do it now. We'll catch you on the next episode. 

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