687: Strategies to Create a Recession-Resistant Real Estate Portfolio

SHOW NOTES FOR EPISODE 687: STRATEGIES TO CREATE A RECESSION-RESISTANT REAL ESTATE PORTFOLIO

Successful real estate investing in today’s economy requires a strategic approach.  Caution and diversity are key!  In today’s episode, multifamily real estate investor and co-founder of SMK Capital Management Mark Khuri shares the creative strategies his company has used to prosper through two recessions.

What You Will Learn

• What three recession-resistant assets are best known for excellent returns during tough economic times
• How long you should hold on to a real estate investment during a recession
• What traits does an investment need to have to prosper during tough economic times
• Why the U.S. housing market is in decline
• How debt can affect your real estate investment returns
• The five key things investors over 50 are looking for in a real estate investment
• What two main attributes should you be looking for in a recession-resistant real estate investment

About Our Guest

Mark Khuri

Mark has been an avid real estate investor for over 17 years and throughout his career, he has been involved in sourcing, underwriting, acquiring, raising capital, rehabilitating, managing, and selling both residential and commercial investments throughout multiple markets in the US.

Mark has analyzed thousands of investment opportunities and has successfully bought, renovated, sold, and invested in over 120 properties with a combined value of over $1 billion and created and managed over 60 real estate partnerships with investors.

More About Mark

• Mark’s career began in finance
• He also did internal auditing
• In 2004-2005, he started investing in real estate on the side
• He expanded his portfolio by partnering with family members
• Mark and his brother bought a fourplex
• His parents and another brother pooled funds to buy some other assets as well
• By 2010, he decided to go full-time into real estate
• His family founded SMK Capital Management at this time
• They wanted to create more diversification and to allow other investors to invest in their projects

How They’re Dealing with Today’s Economy

• Recession-resistance is top-of-mind for his company for the last 5 years
• In 2018, they created a “recession-resistant” fund with the intent of diversifying across lowly or inversely correlated assets such as:
  • Self-Storage Facilities
  • Mobile Home Parks
  • Apartment Communities in the Class B Workforce Housing sector in growth markets
  • Most of the investments were 5 to 10-year holds
    • They were purposely targeting medium to long-term investments with the intention of “weathering the storm” should the economy be a recession, correction, down-turn, etc.
    • They didn’t want to be sellers at the wrong time
  • They wanted the fund to continue to cash flow and maintain asset value
• They closed the fund to new capital in 2019
• The fund has done quite well thus far
  • They have returned a third of their investors’ funds back to them through some re-finances and through a couple of properties that have sold in the fund
  • They have just about caught up with their projected 8-10% preferred returns for investors
  • They stopped investing with the fund about 6 or 7 months ago to watch, wait and analyze to see “what was going to happen” – especially during the pandemic
  • By the 3rd quarter of 2020, they started seeing a lot of demand for affordable housing
  • They saw rapid rent growth, cap rate compression
    • So they adjusted and pivoted their investment strategy a little to include:
      • Shorter-term investments
        • Typically, 2 to 3-year value-add holds
        • 1980s vintage apartment communities with rents well-below-market
        • Rehab between 5-10 apartments a month
        • Increase rents
      • Not focusing as much on cash flow
• For 2022
  • Back to recession-resistant investments
  • Medium to long-term holds
  • Focusing more on growth
  • A lot of fixed-rate debt
  • More cautious approach
  • Still doing funds
  • But also will target and feature one project
  • They are in over 30 states, predominantly in the Midwest, South and Southeast U.S.
  • Criteria hasn’t changed much over the years
  • They are being more careful as to the type of debt they are putting on the asset
    • Being more conservative than before
    • With interest rates increasing, they continue to monitor daily
    • They are remaining very patient and just watching where things are going
  • The last deal they did was an affordable housing community in Houston
    • They did agency debt
      • 10-year fixed rates at 4.94%
      • With 7 years of interest only
      • and 76% low to cost
      • Very safe structure

Recession-Resistant Assets

• Mobile Home Parks
  • The most affordable housing option
  • Barriers to entry to create new mobile home parks are extremely high
    • You have a fixed, and even declining, supply in some markets
  • It’s a unique asset class
    • During tough economic times, there is a strong demand for this type of housing
• Self-Storage
  • There is a lot of data on how self-storage has reacted during various market cycles
    • In tough economic times, people tend to move out of their current homes
      • May down-size
      • Relocate
      • Move-in with family or friends
      • People need a place to put their furniture, etc.
      • Demand for self-storage increases
• Apartments
  • Class B
  • Workforce housing
  • In growth markets
  • for example, 2-bedroom, 900 sq. ft. apartment that rents for $800-$1,400
    • At least 2-people incomes are generally paying rent
  • Local median household income can afford the “post-renovation” rent

How They Are Responding to the Current Economy

• All tough economic cycles are different
• However, the the response is typically the same:
  • They are extra cautious about what they are investing in
  • Maybe even ceasing to invest for a while to “watch and see” what is happening or what direction things are taking
  • Regularly monitoring data for possible investment trends
• As we approach 2023, single family home prices are leveling out and even declining
• There is not much of an increase in housing supply
• Debt has almost doubled in 2022
• The cost of home-ownership is out of reach for most Americans
  • Pre-Covid, 59% of Americans could afford a home
  • Now, it has gone down to the high 30% range
• Mark thinks they will see more market clarity once the Fed shares where interest rates are going
  • A recent Fed meeting said that they may be reducing rates
• According to Mark, there isn’t a lot that seems wrong with the economy
  • We’re not seeing distress in the assets themselves or the demand
  • The main issues in today’s economy is inflation and high interest rates
  • When you look at apartments, for example…
    • Occupancy is in the high 90% range across the US
    • Demand is skyrocketing and has been for a while
    • Continuing to see some organic rent growth in most markets
      • Not nearly as much as we have seen over the last 2 years
    • The basic investment fundamentals have been good (also the same is with mobile home parks and self-storage)
  • They will continue to track supply and see where those rates go

Biggest Mistake

• Looking back at their pre-Great Recession investing in 2005-2010, there were doing a lot of single family and small multifamily (12-units and less) investing
  • Most everything they were buying was distressed
    • Boarded-up
    • Vacant properties
  • They were paying all cash directly from the bank (REOs, foreclosures, etc.)
  • They were putting a lot of money into the properties to make them “beautiful again”
    • They over-renovated
    • Over-spent
    • Took too long
    • Part of this was from an emotional decision
  • They weren’t getting the return for the money they were putting into the properties
• The lesson learned was to:
  • Not be emotional when making decisions regarding your value-add efforts
  • Treat it as a business
  • Say “no” to certain upgrades that were not critical

Biggest Success

• By 2009-20210, when Mark and his father created the company, he went to a lot of networking conferences, real estate meet-up groups in Southern California (where he lived at the time) for about 2 years – almost every week
• He met a lot of people who were very dedicated, seasoned investors in the real estate investing space
• He learned a ton of valuable information
• He had many notebooks filled with notes
• Many handshakes with lots of contacts
• A lot of the people he met back then are still with them today!
  • Investors
  • Sponsors
  • Operating partners
• He was motivated by a “never-ending quench for education and content”
• Extremely valuable season of his career

Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years

• A lot of his clients are 50 plus in age
  • What most of his clients tell him that they are looking for is…
    • Capital preservation
    • Income
    • Growth
    • They also want to remain passive and not have to deal with tenants, toilets, etc.
    • They also want to avoid the stock market
• The design and structure of their investments is designed to meet those needs
• Mark’s father was heavily vested in the stock market in the Great Recession and learned the hard way what not to do
• That’s why they are very focused, with all their real estate investments, to see:
  • Pretty consistent distributions
  • Retaining or growing asset valuation
  • Income
  • Capital preservation
• They remain committed to finding and source opportunities they think can weather a storm
• They also remain conservative with longer projected holds
• He always looks at each new deal by asking, “Will I be happy with this investment in 3 years?”
  • The answer has to be, “Absolutely!” or they won’t do the investment

Current Business

• His company is on a trajectory where they feel they don’t need to do anything different
• It sounds simple but that is what he likes about it
• There are going to just keep going and doing the types of investment they have been doing
  • Add to and grow their portfolio in a meaningful way
  • Be even more diversified than they are today
• They aren’t really looking for something special or new
• They just want to continue with what they have been doing because it works
• Diversification remains an important feature of their investment strategy
  • From 2005-2009, he was working with a private distribution company that had about $5 million in revenue
    • He helped them grow and expand their company
    • They got a large client/account
      • Revenue grew to $90 million annually
      • Then, the Recession hit
      • The large account went away
      • The company went back to $3-5 million annually
    • He learned a lot about diversification from this experience when you have “all your eggs in one basket”
  • Also, on the real estate investment side, when he left corporate America, they were predominantly focusing on single-family and small multifamily investment properties, which didn’t do very well throughout the Recession
    • But, through the networking events he was attending, he found out about other asset classes that had done pretty well (mobile home parks, self-storage, some apartments, etc.)
      • And he wanted to start diversifying into those asset classes

Rap-It-Up

• Favorite real estate book: Investing in Real Estate Private Equity by Sean Cook
• Favorite business book: What it Takes by Stephen A Schwarzman (Co-Founder of Blackstone)
• Most valuable web site for success (other than your own): GreenStreet.com and MarcusandMillichap.com
• Favorite app: WeatherApp
• Favorite quote: “Rule #1 – Don’t lose money.  Rule #2 – Don’t forget rule #1.” – Warren Buffet
• If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to re-launch your real estate investing business? I would just (use the money to) go network again like I did 12 or 13 years ago, when I first got started full-time in real estate to grow my network. 

How To Reach Mark

• Company Website: SMKCap.com

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