SHOW NOTES FOR EPISODE 617: KNOWING HOW TO RIDE MARKET CYCLES

Raging inflation.  Rising housing prices.  Stock market uncertainty.  How can you invest in real estate markets when there is such chaos?  In today’s podcast, experienced real estate investor, co-founder and managing partner of Trion Properties Max Sharkansky shares how his successful investment strategy used during the great recession is helping him to successfully invest in today’s market.

What You Will Learn

• How to successfully anticipate and profit from market shifts
• Why it’s smart to build up your capital reserves now
• When to sell your portfolio to take achieve significantly higher profits
• Why real estate investors are pulling back on further investing
• When it is no longer advantageous to utilize the value-add strategy
• What the hottest U.S. multifamily investment markets are today
• Why real estate doesn’t kill people and debt does

About Our Guest

Max Sharkansky

Max Sharkansky, co-founder and managing partner, oversees all aspects of acquisition, disposition, and property analysis for Trion Properties. Since the firm’s founding in 2005, Max has led the acquisition, renovation and disposition of more than $1 Billion in mismanaged, distressed, or under-valued multifamily assets averaging an IRR in excess of 25%.  Max, along with partner Mitch Paskover, initially formed the Company to acquire properties in Los Angeles.  Max led Trion in the execution of several acquisitions in the firm’s first two years of existence, exiting the portfolio prior to the economic crisis.  With cash on hand and no resources tied up in workouts, Max led an acquisition strategy of targeting distressed debt secured by multifamily REO’s, which led to the ultra-successful campaign of the acquisition of 20 properties throughout the downturn.

More About Max

• Max graduated from college (Loyola-Marymount University) in 2001 (around the time of the dot com bust)
• He knew he wanted to be in the financial world but he wanted it to be related to “tangible assets”
• He saw dot coms just go up in smoke because they weren’t tangible
• Real estate was tangible and immediately grabbed his attention
• That looked like an awesome business for him to do when he graduated
• His first job was working at Marcus Millichap as a commercial broker
• He made pretty good money (around $50K a deal) and started tucking it away in savings
• It didn’t take him long to see that his clients were making lots of money and he definitely wanted a piece of the action
• He and his friend and business partner Mitch Paskover decided to start buying small multifamily properties in the San Fernando Valley (the market he served as a broker)
• When their money ran out, they started to raise capital

The Great Recession/Global Financial Crisis

• Unlike today, where things are happening very fast in the economy, back then, around 2007, he was seeing obvious signs that problems were coming
  • The first sub-prime lenders started to fold in 2007
  • Capital markets started to shift rapidly where all the buyers started to go away in the summer of 2007
• In January of 2008, Max and his partner had a conversation
  • They discussed how things were going in the economy and they knew it wasn’t up
    • They saw rents going down
    • Vacancies were creeping up
    • Everything from macro to micro were going in the wrong direction
• They decided to sell their entire portfolio
  • They sold everything before the crash happened
  • As they sold, they shifted from buying deals from owners through the broker community to calling banks to buy debt
• They bought a few properties in the first quarter of 2009
  • One they ended up selling one property at a profit
    • They had increased the ROI, through value-added strategies, by so much that they still made a profit
  • The other property was sold at a small loss
    • There were no investors in the deal
• They ended up sitting on a lot of cash for a few months
  • Then, they switched their acquisition strategy from buying value-add multifamily to targeting non-performing debt secured by multifamily and multifamily REOs
  • Dealing with notes and REOs
  • Since they were now dealing more with banks, they had to go where the banks sent them
    • They were now dealing with distressed properties in downtown L.A.
      • Dealing with slum lords
      • In rough areas
    • Then they went to San Diego, Fresno and Sacramento
• The single family world completely melted down
• Some of the most qualified people out there could get loans unless they put down extremely high down payments
• Multifamily did much better than single family and other commercial
  • Of course, you had vacancies go up and rents go down a little bit
    • In major markets, you saw occupancies go from 96-97% to 89-91% and rents go down 10-20%
    • You had some concessions
    • Yes, it hurt for a little while but, in a year or two, things started to recover
  • But it was nothing compared to what was going on in office and retail where a major crash occurred
• The country went from one of the highest home ownership rates in history to one of the lowest
• As the economy started to recover (2010-2011), you had household formations (when new households are formed) return again
  • Whether that was people moving out of their parent’s house
  • Or people moving away from roommates

Market Recovery

• As things started getting better, they shifted back to their value-add strategy
• Stopped buying notes and REOs
• “Starting go to the East Bay, to focus more on the “growth story” as opposed to the “recovery story
  • They were starting to see a lot of growth in the East Bay
  • People had exited the Bay Area during the recession
• They crossed state lines into:
  • Portland, OR
• Now they have expanded to Miami and the South East (Georgia, South Carolina)
• They are in California, Oregon, Colorado
• Today, they have over 4,000 doors
• By July, they hope to have 6,500 doors

Today’s Market

• A lot of real estate investors are pulling back because of:
  • Interest rates
  • CPI
  • Inflation – it hasn’t happened like this since 1979
    • Inflation pushes up rents
• If interest rates go up, so will rents
• If we can control interest rates where you are buying and you’re buying in high growth markets that will also have the tailwind of inflation, you should be fine
• He currently is buying 5 assets
  • One in Miami
  • One in Atlanta
  • One in Savannah
  • Two in Denver
  • These are very high-growth markets
  • With high immigration (Immigration is the international movement of people to a destination country of which they are not natives or where they do not possess citizenship in order to settle as permanent residents or naturalized citizens.)
  • They will benefit from the immigration, the creation of jobs and the current macro environment
  • If they can manage their interest rates, they should do fine
• He loves agency debt (Fannie/Freddie)
  • But with cap rates what they are today, you can’t get any meaningful proceeds from the agencies
  • So, he’s buying with 100% bridge
  • 2 years ago, it would have all been with agencies but that environment doesn’t exist today
    • We’re at 3.5 cap rates
    • The market hasn’t moved yet
    • And the cost of capital will soon be 5-6%
    • You can have to buy with the bridge but you can manage the interest rate exposure by…
      • buying rate caps
      • swaps
      • getting less debt
      • lower LTV (loan to value)
        • The less debt you have, the less exposure you have to interest rates
      • Bridge loan terms are
        • 3+1+1 (3 year term with two one-year extensions)
          • The first year does not have a test, which means you can automatically get the extension if you pay a small fee
          • It’s a de facto 4-year loan
            • That gives you enough time to get in and out of any kind of downturn
      • They typically re-fi out in 18 to 24 months
      • They execute on the business plan
        • Renovations
        • Increase in NOI
        • Then they re-fi
  • For investors
    • An 8% preferred return
    • 75/25 there after with a catch-up to the manager
• His focus is on managing debt
  • “Real estate doesn’t kill people  – debt kills people!”
  • If you’re over-leveraged or have a lot of exposure to interest rates, you’ll probably get hurt

Deals Today

• They try to buy as many off-market properties as possible but it’s impossible to buy only off-market, especially if you want to scale
• Looking at marketed deals…
  • Coincidentally, in January, right after the big national multifamily conference, a lot of deals come out
    • Both his Miami and L.A. offices were looking at about 50 deals
      • Of the 50, they found 10 to be viable
        • Of the 10, they figured they would buy 2 or 3 out of each office
• Ideal criteria for deals they seek
  • Their North Star – their most important metric in analysis is Un-trended Return-on-Costs
    • If you snap your fingers and mark all the rents to market, post renovation, and you add all your capital expenditures to the purchase price, what is your cap rate based on those numbers?
      • They then add in some conservative growth assumptions and that’s how they get their Trended Return-on-Costs
        • That will typically spit out an IRR in the high teens to twenty plus
    • They typically aren’t buying unless it’s a 17.5-18% gross
• Their hottest markets are:
  • Florida
    • the immigration is unbelievable
    • Orlando – #3 rent growth area in the U.S.
    • Miami
      • On service sees Miami as the #2 rent growth area in America
    • Tampa is #1 rent growth area
  • The Mountain States
    • Denver
    • Portland suburbs
      • Huge rent growth going on there
  • California
    • Despite poor publicity and losing 1% of its population
    • There’s a lot of immigration there
    • Sacramento is good
      • A lot of people from the Bay Area relocating there
    • A lot of people are leaving L.A. for…
      • Orange County
      • Inland Empire
      • Both have massive rent growth

Biggest Mistake

• They outsourced early on and it had a lot of problems
• They later switched to insourcing everything (property management, construction, accounting, etc.)
• This has made their business much more efficient and effective
• Everything is superior when you have functionality inhouse

Biggest Success

• Their emphasis on syndication and pounding the pavement
• Growing their investor base through…
  • Constantly going to conferences, networking events
  • Online advertising
  • Online influencers
  • Digital marketing
  • New economy strategies online
    • Crowdfunding early on where they could keep the investors
  • Word-of-mouth

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

• Today’s economy is hyperinflationary
• Inflation is 8.5% (trailing) – Could be 9 or 10% or higher!
• He recommends that you be careful with debt
• He wouldn’t let the low cash-on-cash numbers scare you
  • There is generally very little or no cash flow for 6 to 12 months
  • The numbers overtime will be 0utstanding
  • Vacancies are nearly zero
• This is a great time to invest in real estate

Finding a Good Syndicator

• Look at the jockey (sponsor/operator) not the horse
  • How long has the sponsor been in business?
  • Look at every single deal in their track record, since day one
  • What were they doing in the Global Financial Crisis?
  • If they have had losses, how did they behave with their lenders and investors?
    • How much money did their investors lose?
      • What was it dollar-for-dollar?
      • Did the sponsor help with the loss?

Current Business

• He’s excited about the growth of his business – it’s been hyperbolic!
• He wants to continue to grow
• They started as a couple guys buying apartment building in the San Fernando Valley
• Today they are in 7 states, going to 8 and 9
• Excited going from $20 million to $50 million, $50 million to $100 million and further
• Bought their first 9 figure deal last year and working on their second

Rap-It-Up

• Favorite real estate book: Zeckendorf: The autobiograpy of the man who played a real-life game of Monopoly and won the largest real estate empire in history and The Real Estate Game by William J. Poorvu and The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
  Favorite business book:  Shoe Dog: A Memoir by the Creator of Nike By Phil Knight and The Snowball: Warren Buffet and the Business of Life
• Most valuable web site for success (other than your own): GlobeStreet and Wall Street Journal
• Favorite app: Twitter
• Favorite quote: “It’s not real estate that kills you – it’s debt that kills you!”
• 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 go buy a duplex, then a fourplex, and do it all over again! I’d raise some equity and raise some debt!

How to Reach Max

• Website: TrionProperties.com
• Email: Max@trionproperties.com

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Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com