Speaker 1I just told him, I'm like, look, I've ran the numbers so many different ways. I don't see how we're not hitting a 20% average annual ROI to our investors. He said, great, show them 15. And so just that idea of, and I was young and hungry. I was like, wait, why would we do that? I'm telling you, we can get 20. And it's just going back and forth about always trying to under-promise and over-deliver.
Speaker 2Hey, what's going on, everybody? Welcome back to the Land Development Podcast. I am your host, Ryan Glick. I'm excited to have with me today, Mark Curry. Mark is the co-founder and CEO at SMK Capital Management. Mark, thanks for joining me.
Speaker 1Yeah, thanks for having me, Ryan. Good to be here.
Speaker 2Well, I want to get into your background before we jump into some of the topics that we're going to get into. And before we press record here, I was kind of talking about, a lot of the people who listen into the show are developers and builders. And so you have a breadth of knowledge in the capital space and being able to talk about real estate investments and everything. And we're going to really focus today on some of the fundraising. We're going to talk about really things that will help developers and builders. And before we get into some of those topics, I first want to get into your background. And can you share how you... Kind of your early career and walk us through that and how you got into your company right now?
Speaker 1Yeah, yeah. Happy to. Thanks, Ryan. So essentially, I started a career in corporate finance. So a lot of spreadsheets, budgets and planning, internal auditing. And that transitioned pretty well into real estate investing. I also was in operations management for a number of years. And so, yeah, those two matched well for real estate. And I started... Like a lot of us do, very active investing on the side after work, buying a fixer-upper and going there every single day and going to Home Depot and doing everything yourself. And then pulled some money out of that one, partnered with my brother, bought a fourplex. We overpaid, over-renovated, overspent, over everything, learning a lot by doing. But that was... Jeez, when was this? 2005-ish. So during the previous cycle before the recession. And... Yeah. And so then we just kept going, right? It was like, okay, wow, everything's on sale. You can see 2008, 9, 10, you're buying stuff at 50 cents on the dollar. And so I just partnered with my family, my folks, my aunts, uncles, cousins, anyone that was interested at the time. And we built up a small portfolio, again, all while working full-time. Mainly heavy, kind of distressed value-add, all cash from the bank. Kind of purchases, REOs, short sales, foreclosures, and forcing appreciation through, you know, construction, renovations, upgrades. By 2010, I was hooked. I left the W-2 and started our company, SMK Capital Management. Actually partnered with my father. He's since retired, but SMK is his and I's initials. And we went out and started raising capital from people outside of just our family. You know, those that already knew, like... And started diversifying into other real estate sectors. And, you know, that was, what, 16 years ago now. And so we've done a lot since, but that's the early days and kind of how I got started.
Speaker 2Well, that's really cool. And I'm curious, did you, was your dad or anybody in your family in this industry before you got into it? Or did you kind of all figure it out together?
Speaker 1So my father's been a real estate investor since the 70s. And so he's a... Retired surgeon by trade as well. And so just always doing something. But yeah, we had real estate in our family growing up. You know, some of my earliest memories are when we're sitting in the family room and he comes home with a bag of quarters from the laundry machines at the apartment building. And we had to sit there, my brothers and I, and count them and stuff them in the little sleeves to deposit them in the bank. And so you start learning that money comes out of properties often. Not always, but that's the early days.
Speaker 2Yeah, well, I love that. And I love those stories. When you grow up in a family that's in the industry and maybe from a young age, you feel like, hey, you know what? I may not start down this path, but this is where I want to end up. Did you have that feeling early on? Or did you legitimately maybe didn't know that you were going to end up where you're at right now? And you thought you were going to go a different path?
Speaker 1Yeah, I did not know that real estate was the path for me. And what's interesting, I remember in college, you know, I had to pick some elective courses. And one of them was... RE101. And I didn't even know what that meant. And I signed up. And sure enough, it was real estate. And so I was in my first real estate class just because I needed to pick something to get the credits. And I loved the class. And so that was a big start. But I always wanted to be an entrepreneur. That was in the back of my mind. And I did like the numbers and the math and the money side of things. But I didn't know that real estate was going to be the way I went. And so, you know, here we are.
Speaker 2Do you have any early memories? From, you know, from your dad that maybe he taught you or things that you still keep with you today? You mentioned the quarters that he brought home and you kind of understood where that came from. It wasn't magic or anything like that. It was from these investment properties and everything. Do you have any other lessons learned from those younger years?
Speaker 1Yeah, there's a couple. One, we were walking a pretty distressed property in Florida. This is probably 2008 or 9. And sure enough, we went in the attic to check it out. Which wasn't a smart idea. And he stepped on, he was not walking on the two by four and he went right through the ceiling and huge nails scraped up his leg and blood everywhere. And we had to pull him out of there. And so, you know, it was, it was definitely a memory of, you know, if you don't have to walk in the attic, don't let someone else do it. But on a more of a deal level, I remember we were, we were, we were underwriting a deal. I forget if it was duplex. Or triplex or something, but it was a vacant and we were going to renovate it and then rent it and sell it. And, you know, I ran the numbers, you know, five, six, seven different ways to try and figure out what's the likelihood case, the best case, and then like the downside protection case. And, you know, I just told him, I'm like, look, I've ran the numbers so many different ways. I don't see how we're not hitting a 20% average annual ROI to our investors. He said, great, show him 15. And so just that idea of, and, you know, I was young and hungry. I was like, wait, why did we do that? I'm telling you, we can get 20. And it's just going back and forth about, you know, always trying to under promise and over deliver. And so that was a big part of some of my earlier lessons he taught me as well.
Speaker 2Well, let's talk about your company. So SMK Capital Management, for those who are listening in that may not be familiar with your company. Can you talk about what you guys do?
Speaker 1Yeah, we are a essentially evolved to a private equity real estate investment. We utilize relationships with other operating partners to access, you know, a lot of private real estate opportunities. We raise capital from our investor network into an SPV or special purpose vehicle that we will create and manage. And then we deploy and allocate capital to different deals that we like and that meet our investment criteria. And so fund manager, investment manager, you know, all. All accurate descriptions of what we do in our firm. We do focus on diversification. So we like to invest across different real estate sectors, regions, operating partners, strategies. You know, a big one for us. We do like cash flow. And so we're trying to almost always provide our investors with, you know, immediate cash flow in year one. We're looking for average cash flow, usually seven to 12%. Over the hold. Still usually starts a little lower and then it ramps up. Average annual ROI targeted is, you know, call it in the low to mid teens these days. And equity multiple 1.5 to 2.5 X is where most of our deals land.
Speaker 2So you mentioned you're doing projects or investments around the country. What's where's home base? Where's your headquarters at?
Speaker 1Live in Bend, Oregon. So it's a great place. To raise a family. But we don't do much investing out here.
Speaker 2Yeah. Well, what's so being out in that area? Is that just where you were raised out in that area and that's why you live out there? Or what is it about Oregon that has you living there?
Speaker 1No, I'm actually from the Northeast, upstate New York, born and raised. And so I moved to California when I was working in finance. My company moved me to the Los Angeles area and just never left the West Coast. Honestly, it's a lot better weather. And we, my wife and I just kind of. Kind of stumbled on Bend, Oregon about 10 years ago, and we moved up here and haven't looked back since.
Speaker 2What's it like managing, you know, projects or investments or even doing due diligence on certain, you know, perspective investments and everything from a remote location or a location where you're not necessarily doing the projects in your backyard? What does that process look like for you?
Speaker 1Definitely fine tuned over many, many years, but we were looking at two to three investment opportunities every single day. So roughly six. to 700 a year. From that, we invest in about 1%. And so it's a filtration process. We have a 40-point due diligence checklist that we've created and follow to really fine-tune and weed out most of the no's to find specifically what we're looking for. Sponsor operating partner evaluation is critical. That's one of the first and most important steps. And it never really ends because even after we invest with a group, we're on asset management calls with them and constantly tracking, monitoring, following progress, what kind of hurdles and obstacles and challenges do you have to overcome and how do they handle those and how well do they communicate and how transparent are they and how accessible and all these things matter because we're relying on them to execute on the day-to-day operations and deliver. And so that's a big part of the due diligence. And then from there, it's deal analysis, underwriting, market analysis, financial analysis, lots of metrics, due diligence. We often visit the properties, looking at the vision on the ground, the team, who's going to handle the day-to-day, and then we're always trying to weed out red flags, yellow flags, get clarification, and that kind of thing. So yeah, it's a process. That's where we spend a lot of
Speaker 2our time. Well, you've obviously done thousands, evaluated thousands of these different opportunities over the years and digging into 1% or even probably less than 1% of these that you actually invest in. What are some of those first things that you're looking at that allows you to just quickly say, nope, nope, or I'm moving on? Are there certain, like these red flags that you speak of, what are those that may be helpful to people listening in? Yeah, I'll break it down into a few
Speaker 1categories, right? So let's start with the first one, like the sponsor and operating partner, pedigree, expertise, size of the team. We were not going to invest our investors' capital into a one- or two-man team. It just doesn't work for us. God forbid something happens to them. It could greatly disrupt the business and our capital. And so that's a big one where it doesn't mean that the deal can't go well, but we just find it to have too much risk. And so we're constantly measuring risk and reward. And so that's one factor. If the operator team is potentially new to the sector, maybe they pivoted from senior housing to apartments or something like that, we'll pause, right? It's new for them. Let them learn on someone else's money or their own money. So those are just a couple of quickies on size and category that they're focusing on. From there, there's a lot of things in the underwriting that we'll look at. That can be red flags or have us just pause, but some structural, like we don't like preferred equity ahead of common equity. If we're going to invest in common equity, it's just having pref ahead of us, especially if the amount or the terms aren't disclosed, which we see a lot of times. It's like, hey, we're going to have this tranche ahead of you, but we don't know exactly how much yet. And so it just adds as more debt and increases risk for common equity, but it also can increase return. And so some people like it, but we just tend to stay away from that. Floating rate loans, without adequate rate caps or maybe expensive renewal costs, we tend to stay away from those. Short-term loans, again, we're trying to weather a storm. If there's something that happens in the economy or the local market, you don't want to be forced to sell at the wrong time. And that's where you can lose money in real estate. Waterfalls, splits, all can be deal killers, just to be honest. We've seen some, it's just like eye-popping at what people invest into, and we'll just throw the deal out within a matter of minutes. And so if you want me to get into numbers, I'm happy to, but those are just some of the categories we could dive into.
Speaker 2Well, I think what I think would be interesting is, do you have any, like a deal in the past that you walked away from and you're able to look in hindsight and say that, yeah, I'm glad I walked away from it? And then I'm curious on the flip side too, do you have some that you look back on and you passed on it, but then you look back on it and you say, man, we missed on that one, but it's still, I mean, obviously still okay, but do you have any examples like that?
Speaker 1Yeah, totally. I'll give you an example, excuse me, of a apartment deal we passed on recently that within five minutes of looking through the deck, we just threw it out and we're like, whoa, run away. So I don't remember the exact number of units or where it was located, honestly, but it was in the Sunbelt region. It was an acquisition, you know, over 90% occupied at the time of purchase. But some of the red flags for us, they had a 4% acquisition fee, which was, you know, one, 2% is normal. Double that is a lot. Seven and a half percent construction management fee. And it was unknown, like, I'll keep going. Anyway, what it came down to on this deal, we like to look at what's the purchase price versus the total all-in cost. And it was 33% higher, the total cost versus the purchase price. And so that's with all the fees and the different front-end loading. I think that also included CapEx. So you have to always look at that because that's money that's going to go back into the property for renovations, upgrades, and hopefully improve rent roll. But, you know, if you have that big of a delta between purchase price and all-in cost, it means that the value needs to increase by 33% before you can even break even. And so it's just a big, big uphill battle to get just to break even right off the gate because, again, fee structure was way out of line. And so that was a big red flag. There was pref equity. I had a common equity. The amount was not disclosed. Floating rate loan with two one-year extensions. They built over $100,000. They built over $100,000. They built over $100,000. They built over $100,000 basis points of cap rate compression into the projections. So they expected the market to significantly improve. And I'm pretty sure they had negative leverage on it going in day one. And they had a category in their pro forma called operational reserve release, which is a fancy way of saying we're going to over-raise capital and return it to you in the first year or two because there isn't enough cash flow coming out of this thing to show you a return. And so return of investment versus return on investment, it's a big, all of these are no-nos and we saw them all in just one deal.
Speaker 2Wow. You had mentioned when you saw the pitch deck and within five minutes you threw it out. I'm curious for, I'm sure a lot of the developers and builders out there listening in, many of them probably raise capital or they're in the process of now or they will at some point in the future. What are your thoughts on how they should approach the capital raise as far as the presentation side of things, right? So the details that are put together from your thought process, you know, is it, you know, keep it simple and really focus on only certain things or what, what are the, what are the things that people can do that you feel will catch the attention of the investors? Yeah, it's a good question. So I think
Speaker 1we might not be your typical retail investor, right? We're analyzing this from more of an institutional lens. We're analyzing this from a more institutional lens. We're analyzing this from a more institutional lens and, and raising capital from our investors. And so it does, it's not a one size fits all answer, right? You've got maybe your retail investor who's looking for something more simple and easy to follow versus us. You know, we want to see the details. We want to see the financials, you know, too much is, is not an option, right? You can, can't give us too much detail, right? When it comes to projections and transparency and underwriting. Um, and so we like to really get in the weeds. Now, obviously sophisticated investors are very similar where if the deck's too thin and there's just not enough detail, all you're doing is, is creating this, you know, series of questions that need to get answered that could have already been answered in the first place. And so it's oftentimes can be a sign of, you know, I don't know, lack of effort maybe, or too simple isn't always very good in my view. I'd rather have more information than less. Do you, so you had mentioned you guys do, um,
Speaker 2roughly two to three of these deals per day, or you analyze two to three of these a day. And then, you know, over the course of the year, 600 to 700 of them. Uh, what is it about, is it ever just something where you look at one and it, it like stands out to you or, I mean, are you literally digging into every single one? So how it looks isn't as big of a deal as the substance inside of
Speaker 1it. Yeah. Visually, appealing isn't that big of a deal as long as there's not, you know, typos. And we've seen that to, um, math that doesn't add up. We've seen that, but when you're a little more sophisticated, you don't tend to find those issues. It's more looking through the deck and trying to figure out, is this something we want to look further into or not? And, you know, two, three, four nose in a deck, boom, we just throw it out. We don't waste more time with it. And so it's not always like someone's doing something wrong. I don't, I don't want to give that impression. It's just that the deal may not fit for what we're looking for, right? If there's too heavy of a value add and there's no cash flow, there's nothing wrong. It just doesn't work with what we're trying to do. Or if it's in a sector that we don't invest in, like hotels or office or senior housing or student housing, you know, again, we might take a look at it, but it's probably not going to be something we'll put capital until. What asset classes are you really interested in today? So, yeah, I mean, we've invested in probably over a dozen real estate sectors over the years. I'd say over the last eight years, we've really fine-tuned it down to kind of our top five or so, which is mobile home parks, some self-storage, industrial, which can be small bay industrial or triple net sale leaseback industrial. We also invest in some multifamily and industrial outdoor storage is another one that's pretty new for us and some private debt as well.
Speaker 2When, so kind of going back to what we were talking about with the presentation side of things. So say that you go through, you look at the pitch deck or the, you know, the financials and everything, and you're like, all right, this, we should, we should go to the next step with this and we should have a conversation with the operator or take a look at, at the asset. What, what are you looking for in that conversation when you're actually meeting the operator or you're looking at the
Speaker 1asset for the first time in a little more detail? Yeah. So assuming we don't really already have a relationship, we're going to look at the asset for the first time and we're going to look at the asset for the first time in a little more detail. Yeah. So assuming we don't really already have a relationship with the operating partner and they're new to us, I think is probably what you're asking. Then, you know, we'll, we'll we'll have an intro call. We'll get to know them. If we don't already know the size of their firm, the assets under management track record background, just trying to get to know them a bit better. How long have you been doing this in this strategy? How big is your team, right? Do they have a acquisitions team? Do they have an asset management team? Are they doing property management in-house, vertically integrated or do they outsource it? What's their geographic focus? And then you kind of say, okay, this is interesting. This fits what we're looking for. Let's move on. If we both agree to a bit more of a due diligence process together, well, we'll send them over our due diligence checklist, which is a, you know, formal kind of, I say informal, but formal, like we're expecting them to respond to it and give us answers and information and examples. Of reporting and this kind of thing. That's the first round of due diligence. It's more general in nature about the firm. And we're asking for, you know, statements. How do you report to your investors? What kind of detail are you providing or lacking thereof? And so then we'll get further into the, you know, the deal specifics from there and do an underwriting analysis. We'll get on the phone with them sometimes with their acquisitions teams that sourced and created the pro formas and the projections and really try and understand their methodology of determining, you know, rent growth expenses. We're looking at the sellers trailing 12, 24, 36 month financials, you know, line item by line item. They've been doing it this way. We expect the cost to go up or we expect the cost to go down. And here's why, you know, are you being conservative? You're being aggressive. And, you know, for example, there's some operators that know a market in and out, right? They might own thousands of apartments, for example, in a very specific market. You have to know that, that the sellers trailing 12 financials may not match what the operating partner can do. And they might be able to shave off costs. That could be a benefit. And then first glance, you might think, oh, they're just being aggressive with underwriting. The operating partner was running a, you know, 55, 57% operating expense ratio. Why do they think it could be 45, right? So then if that happens, you'll say, you know, in that instance, show us your expense ratios on all your other deals in this sub market, right? And so that we can see that they're running off their own comps, right? There's a little bit of inside information. And so there's a benefit there, but all this comes into play when, when looking at
Speaker 2a specific operator in a deal. Yeah. I wonder too, with some of the developers that may be out there doing some of their first projects. And I know as I'm speaking about developers, I know I may, I may be talking about an asset that hasn't even been built yet, but you know, when they're relatively small, right? They don't have the track record. They don't, they're, they wouldn't even in your case fit into the scenario where they have a big enough team for you to even want to consider investing in them. Where do groups like that, where does it make sense for groups like that to turn when they're, they're pretty early on? Is that where you're in the friends and family and kind of like you talk about, you know, you're in the friends and family and kind of like you talk about when you're early days where you were reaching out to different family members and trying to raise capital that way to start your business and get going? Is that what it looks like for some of these younger developers in the industry? I think so. Yeah. I mean, again,
Speaker 1depends on their background. If they're coming out of a institutional shop where they were doing this for 20 years, it might be a different story, but if they're kind of bootstrapping and, and hugging along and doing it themselves with a partner or two, and they don't have a lot of history or track going to be hard to attract, you know, I'd say larger checks from more sophisticated investors or institutional shops. And so it doesn't mean you can't be successful, but you're going to want to, you know, keep that inner circle close. Friends, family referrals are huge. Go to investor meetup groups, speak at them, you know, get, get your local community to know, like, and trust you. Um, and, and start raising small, be transparent, be as generous as you can. And still keep the lights on to make a profit. I've seen so many young groups, not necessarily in development, but in other real estate sectors that just come out with crazy terms. It's like, well, you have two years of experience and you want to take a 50% split where the pros been doing it for decades, you know, take a 20% split. So why, why is it that we should do this with you and not them? Right. And so, you know, be aware of what your competitors are offering and, you especially if they're of high pedigree. Do you have over the years, a favorite
Speaker 2project or deal that you have been a part of? Oh man. There's a couple that come to mind,
Speaker 1of course, um, that were favorites, a tough word, right? Yeah. Yeah. No, I get that. We've got some that I love and there's others that like, oh my gosh, you know, for example, like a negative, but turned into a positive. We had a property in Florida that, uh, burned down. Um, go figure. We've had, I mean, you do this long enough. There's always some kind of trouble you have to manage through, but, uh, this one was a Ford excursion tenants car in the garage that spontaneously combusted one day while they're eating dinner and they had to jump out the kitchen window to get out of the house in time. So thankfully they were okay, but, um, we got the call from the manager and the property burned and it was a, it was a mess to say the least. But he was hurt. But we learned from that one. We, you know, insurance company isn't necessarily on your side. We hired a private claims adjuster, signed over a power of attorney, let them go fight with the insurance company. And they got almost twice as much proceeds out of them than they would have given us if we hadn't hired them. And so there's a lesson learned for people that, you know, it turned out positive in the end, but it took about eight months, almost a year to work through that process. And then of course, loss of rental rate, uh, rental insurance coverage is critical, right? So for that eight to 12 months, we were still getting the rents, even though the tenants obviously had to move out. And so, you know, just, that's a story that may not have been what you're looking for, but one that always comes up in my mind from lessons learned.
Speaker 2No, I think that's good because I think it, it brings up things that not everybody's going to think about when they haven't done many projects yet. I mean, they may be thinking about, yeah, sure, this property, or we need to, you know, buy insurance for this, but not thinking about, you know, we've had on some, uh, some attorney, real estate attorneys in the past. And some of the things they talk about is, yeah, the lost, the lost use of property. Maybe when, uh, when the city takes a portion of your property and where they block off a portion of your property and people can't get into your business, you know, there's lost, there's lost revenue and everything there. And so, um, not thinking about some of those things and the fact that you, there are insurers out there that you could potentially buy insurance for that is something for people to think about. Definitely. Well, let's go ahead and shift into the last segment here, which is a lightning round. So I've got five questions for you, um, all related to your experience and everything. Some of these might overlap a little bit as I'm looking through them right here, because, um, we've talked about some of this, but we'll, we'll go with it anyway and see, uh, might, might be a little bit of a repeat here, but first, first one, what's the biggest red
Speaker 1flag that makes you lose interest in a deal? I mean, I would go with a significant negative leverage
Speaker 2cashflow. All right. Second one. What's one thing that immediately gives you confidence in an
Speaker 1operator? Pedigree. Let's go with track record, pedigree and experience. All right. Third one. What's the best investment that you've ever made? I'd say probably education into myself and our business, just a sponge for knowledge, always reading, learning, you know, chatting with, with others in our industry just to become better. Always never, never just sitting on your laurels and saying, "Hey, we figured it all out." That is not the case.
Speaker 2All right. Fourth one. What's one investment you passed on that you still think about today?
Speaker 1That's tough. I can't come up with one off the top of my head.
Speaker 2Well, maybe that's a good, that's probably a good thing.
Speaker 1Yeah. I mean, a lot of the deals, we just don't know what happens to them after they stop raising capital. So it's hard to know, did we miss out on a home run?
Speaker 2Yeah. Yeah. Well, that's probably a good thing. So you're not thinking about it forever. All right. Last one. If you could give a new real estate investor one piece of advice,
Speaker 1what would it be? Surround yourself with, you know, highly experienced folks that are better at it than what you do and learn from them, see how you can help them and ask a lot of questions and listen. All right. Well, what is the best way for
Speaker 2people listening in to connect with you, Mark, and also to learn more about your company?
Speaker 1Sure. Yeah. I mean, our focus again is, you know, passive income investments in some of the real estate sectors we discussed. If folks are interested in learning more about that or even chatting about, you know, kind of our vetting process, I'm happy to connect. But our website's the best place to go, smkcap.com. Again, our company name is SMK Capital Management. And I would encourage folks to sign up, join our investor network, and, you know, get access to our investment opportunities that way.
Speaker 2Perfect. So if you guys look down in the description for this episode, you'll see a link there to the show notes page. On the show notes page will be the link to that website that Mark just mentioned there. Mark, really appreciate you coming on here and talking through some of your history in the industry and some of the projects and things
Speaker 1that you've worked on over the years. Yeah. My pleasure, Mike. Thanks for having me on.
Speaker 2All right, guys, that's all for this episode. If you're not already subscribed, please click that button. We'd love to have you back for the next one. Otherwise, we will talk to you all next week. Take care.
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