Oct 29, 2022
Mark Khuri brings over 17 years of real estate investing experience to the organization. His career started in 2005 when he began investing in residential real estate in California and Florida. Throughout his career Mark has been involved in sourcing, underwriting, acquiring, raising capital, rehabilitating, managing, and selling both residential and commercial investments throughout multiple markets in the US.
Mr. Khuri 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.
[00:00 - 06:03] How to Keep Your Affordable Housing Strategy on Track
- Mark Khuri has been working in finance and operations roles for a number of years.
- They started investing on the side, primarily in foreclosures and short sales during the pre-recession period
- They are a private equity group that raises capital from investors and invests in larger institutional-quality investments
- The company's latest investment is a 215-unit building in Houston that is 99% occupied and will be lowered in rent over a year.
[06:04 - 11:50] Partnering and Risk Reduction
- This process involves partnering with an investment group that is specialized in this area and getting to know them well.
- Once the partnership is formed, the owner can then access deals that are tailored to their specific needs.
- Partnership with the housing authority in the local region
- Getting the tax exemption approved prior to closing is a process that needs to be finalized
[11:50 - 17:24] Advice for Cash Flow Investors: Be Selective and Stress Test Your Deals
- Mark Khuri and his team waited and analyzed tons of data internally and externally
- They look up if their tenants stay in pay or if there’s going to be distress in the properties they managed.
- That pivoted to saying no to a lot of opportunities for a number of months in late 2020.
- They started realizing, just by looking at the data and the metrics that there's a high demand for affordable housing and for apartments.
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Tweetable Quotes:
“We started realizing, just by looking at the data and the metrics that there's a high demand for affordable housing and for apartments and mobile home parks. And not just from residents, but also from investor groups who we typically sell to, So is watching our exit and the demand for our product going up or down. we saw pretty favorable trends at that point.” - Mark Khuri
Connect with Mark Khuri
by visiting https://smkcap.com/ or emailing him through info@smkcap.com
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Want to read the full show notes of the episode? Check it out below:
[00:00:37] Sam Wilson: Mark Khuri has been an avid real estate investor for the last 17 years and throughout his career he's been involved in residential and commercial investments throughout multiple markets in the us.
Mark, welcome to the show. Thanks, Sam. Good to be back. Absolutely. The pleasure is mine. Mark, I know you've been on the show before, but just for listeners may that maybe didn't catch that last episode, can you tell me in 90 seconds or less, where did you start? Where are you now and how did
[00:01:01] Mark Khuri: you get there?
Sure. Yeah. Started as a financial analyst working in corporate America for a number of years. Lots of spreadsheets, analysis, budgets, Planning, moved over to a operations role and different company. Those two kind of meshed well with real estate investing. Started investing on the side, Sam, like a lot of people do after work, going to Home Depot, renovating.
Hell's Hacking, you name it. That was all pre 2008 recession. And then we started seeing a lot of discounts in the market, investing predominantly in foreclosures, res short sales all cash buys, that kind of thing. And then fast forward, we wanted to expand and diversify into commercial real estate.
We did that, you know, started about 12, 13 years ago in, in that space. And, Now, today, where we at, we like to focus on affordable housing. It's kind of our biggest investment strategy, asset class, mobile, home parks, apartments, self storage, a lot of re recession resistance. Sam, that's our, our focus today.
So we've evolved. We're a private equity group. We raise capital from our investor group and invest in larger commercial institutional quality investments.
[00:02:12] Sam Wilson: I love it. That's a lot of moving pieces there in, in what seems like probably a very short period of time. I do wanna focus in on you. You mentioned affordable housing and that sounds like that's part of a key part of your strategy
[00:02:26] Mark Khuri: right now.
Definitely, and, and I'll expand a bit on that term cuz it can be used a few different ways. But essentially, you know, in the mobile home park space, for example, we're providing housing, which is usually the, the, the least the lowest cost, right? The most affordable option. We believe in that is a long term trend and thread where, where we can have a consistent growing demand for that product.
And then also in apartments, you know, we're typically looking Sam. Growth markets where there's a lot of data and numbers showing long term trends South, southeast, Texas, et cetera. Love those markets. But we're looking for apartment buildings, Sam, that are usually well afforded by the local area, meet and income.
And so there's a, a formula there, there's a way to do the math and making sure that the local population can't afford the rent. And that's, that's a big part of our focus.
[00:03:17] Sam Wilson: How, how do you find an existing complex and keep it in the affordable, affordable range, and yet still provide returns to your investors and to yourself?
[00:03:30] Mark Khuri: Yeah. So, well, as far as finding goes, almost all of our deals come to us from relationships that we have in the industry. They're usually private sometimes off market. Hey, Mark, we got a live one. Are you and your company or family interested in, in co-investing with us, partnering with us, that kind of thing?
For the, the equity in the deal? And so we're always looking at deals. Sam, usually 10 to 20 a month. We invest in about five to seven a year, give or take. Wow. And so it's just a filtration process. We know exactly what we're looking for. It's hard to find, but when we find it, we're ready to go. Right. So as far as the affordability portion goes our latest deal in Houston, for example, is a, a 215 unit building, Sam, it's 99% occupied.
Hmm. What we're gonna do once we acquire it next week, we're scheduled to close we're gonna keep 50% of the units afford. . And so that means we're going to actually lower the rents over the period of about a year and allow for people in the community to be able to afford that unit, right? And, and the other half will stay at market rate.
And so there's a, a very specific strategy here, Sam, where we can increase the affordable housing, the local region. And also, you know, do well as investors. And that, that portion comes a lot from this strategy where there's a property tax exemption. Mm. And so the property for, you know, in return for keeping half the units affordable, we get a exemption on property taxes.
And so that reduces our expenses as we hold the asset and then creates a, a very attractive return for investors while also of course, Increasing affordable housing, which is much needed in the region,
[00:05:10] Sam Wilson: is a, When you get that property tax exemption, is that a dollar for dollar typically exchange as you underwrite it where you're like, Okay, hey, we're gonna, we're gonna reduce rents, which is, I just haven't met anybody else, I think on the show that said, when a part of our plan is to lower rents once we acquire an asset, kind of funny, but once you, once you, once you lower those rents, let's use an example, say a hundred bucks a.
Are you then able to exactly set that off by, or offset that by the dollars that you're saving on the property tax exemptions? And if so, how do you, how do you ensure that you get that kind of process to work before you close?
[00:05:48] Mark Khuri: Sure. Yeah. Uh, So. It's not dollar for dollar. There's usually a benefit to us as the owner and investor.
And so to put it in, in perspective, I'll give you an example. Like the latest deal we're projecting to lower the rents by about $217,000. Annually and we're gonna have about a million dollars in tax savings. Wow. So that it offsets it and it creates positive cash flow. It reduces our expenses pretty significantly.
Sam, which is obviously reducing risk. And so that's. That's usually the offset. That's not always that simple. There's a lot of movement parts here. It's a partnership with the housing authority in the local region. And so there's a lot of legal paperwork, documents structure, and then of course getting the tax exemption to be approved prior to closing.
[00:06:37] Sam Wilson: How do you, how when you, I mean, getting to the point where you have accepted offers, you know, all those things, putting, putting, you know, earnest money down. It seems like this would be part of the equation that you'd really want to have firmed up before you get to that state. Is that the case or is this kind of a one, Would it just, When it happens, it happens in the process, I
[00:06:58] Mark Khuri: guess.
Now you, you got, you gotta know what you're doing. Well, well said. So, yeah. Yeah. This is a, a process for us where we we're partnering with an operating partner, Sam, which is our business model, where we source and, and identify and partner with other investment groups that are specialists in one thing, Right.
Get to know him, like him, trust him, invest with them and then. We get access to these kinds of deals. And so they are experts in this space. This is where they focus daily. They have, you know, 65 staff, just their headquarters, several hundred more across the properties, large firm, a few billion of assets under management.
And so that, that type of pedigree Sam comes with these types of, I call it more unique, favorable for creating a win-win type of investment. And they, they're experts at the process and the structure done it many times before. And so we come in and we, we underwrite, we evaluate, we ask a ton of questions.
We structure the deal from an equity perspective as well internally where we can go out to our investor group and say, Hey, we really like this deal. Here's why. Here's how we're gonna do it, and here's how you can participate if you're interested. So that, that's kind of how it all works. But from the acquisition standpoint, like, yeah.
Condition of closing is to make sure that this is all signed and agreed on prior to re-closing on the property.
[00:08:15] Sam Wilson: Right, right. No, I love that. I love that. That's a very, it's a unique strategy in a way to add value to a property. You know, that probably not everyone, actually, everyone's not employing. So I love I love the thought process there.
Is there a particular. Type of apartment complex that you have to do this in? Or is it, you can take anything and do it? Like what's the, what's the buy box look like on the asset?
[00:08:43] Mark Khuri: Yeah. Well there's a couple ways to kind of decipher how and where to do this, right Sam? So we like Texas. There's pretty high.
Property tax rate there, the millage rate, you know, two and a half, 3%, whatever it might be. Yeah. Right. They also reassess regularly. And so you have a high likelihood of property taxes going up. And so that's a favorable environment. But you also have kind of the, the regulatory environment there too, with the counties and municipalities.
All, all, not all, but many of them being on board, understanding this type of structure and providing it. And so if you go and compare that, You know, other states that maybe have much lower property taxes or aren't open to this idea, it's gonna be very hard to do. So location is relatively, I don't wanna say fixed.
There's other, other areas where it could work too, but we're focusing predominantly. In Texas on this. And so that's kind of how we're looking at it, how we're doing it. I don't know if there was another part of your question, Sam, but feel free to chime in again and
[00:09:40] Sam Wilson: I, I think you've answered it well.
Let's let's shift gears here a little bit. I love, thanks for taking the time to break down your guys's affordable housing strategy. We didn't talk much about mobile home parks but I do wanna make sure that if, if we have time, people will come back to that. But I'd love to hear what else you guys are doing.
I know it sounds like the affordable housing component is part of your, kind of pivoting with the market, but let's talk about what you guys are doing strategically right now to pivot with the market where we are in these market conditions. I mean, just kind of give us what you see and how you guys are, are approaching things right now.
[00:10:15] Mark Khuri: Sure. Yeah. And, and I'll, I'll share maybe a little, little evolution. I may keep it quick, but, you know, we pivoted, we've pivoted several times, Sam, over the last call, 10, 12 years with the markets. First pivot for us was like 2017 ish. We really stopped investing in single family, small multi-family, Sam and focused all of our effort in commercial institutional quality housing.
Hm. And we did that for a number of reasons, but predominantly at that time we just saw less margin. lot of competition. We saw less deeply discounted properties and that kind of window of opportunity post recession was, was closing, to say the least. Wow. So we pivoted there. Then 2018, we started to think and see some indicators that there could be a recession soon.
And so we pivoted again and just decided to focus on recession resistance as an investment strategy. In 2019, we created a recession resistant fund. We combined mobile home parks apartment communities, and self storage into one investment vehicle. We invested across. I wanna say about nine or so different opportunities.
Sam a little over 12,000 units in the fund, 13 states really spreading out capital. And the purpose of that investment vehicle was to kinda hold everything for five to 10 years, right? And, and whether a storm should one come continue to cash flow and hopefully retain asset value through a potential downturn.
So that was a big pivot. 2020 Covid came. We stopped investing for seven months. We didn't make any new investments on purpose. We watched, we waited, we analyzed tons of data internally, externally, and macro, you name it, trying to figure out what's going on. Number one. Number two, our tenant's gonna stay in pay.
Is there gonna be distress? Really trying to, to, to realize where things might be going. And so that was a pivot just to say no to a lot of opportunities for number of months in, in late 2020, we started realizing, Sam, just by looking at the data and the, the metrics that. There's a high demand for affordable housing and for apartments and mobile home parks.
And not just from residents, but also from investor groups who we typically sell to, right? So is watching our exit and is the demand for our product going. Up or down. We saw pretty favorable trends at that point, Sam, There was a rapid rent growth. It was cap rate compression, and we started investing in shorter term deals, call it one to three year holds on purpose.
We were coming in and basically with a, a reputable operating partner to fix and flip a lot of multi-family properties, so we added that to our portfolio. We did a number of those deals and then we pivoted again in Q1 of 2022. Stopped doing short term deals. Now we're focusing again back on recession resistance.
We have been right, we're recording this in October of 2022. And we continued to be focusing on cash flowing investments, long term fixed rate debt. Really just trying to make sure that we can underwrite smartly and whether the obviously the impact of the fed's fight against inflation by raising interest rates you know, very quickly and rapidly.
And so this is how we're pivoting. We're continuously looking at deals today and. Being even more selective than before Sam. I think you know, debt is top of mind. We're still seeing very strong fundamentals. I'm sure you probably are too, meaning demand for apartments and affordable housing keeps going up.
Rental rates are still growing in many markets, not as fast as they used to. We don't underwrite to that, but the fundamentals are there. Occupancy rates are very high, and we're still seeing attractive metrics to keep investing, but we're just being smarter and safer. When
[00:13:59] Sam Wilson: you, when you say that you're investing more for cash flow, which I think is supposed to be.
In theory, everyone's like number one rule, right? And we invest for cash flow, which I, I've heard that said a lot. I don't believe it once. I see a lot of the projections that come out. You see the shiny brochure and you're like, wait, this thing's heavily weighted in the appreciation category. But thanks for sending it over.
But, but how do you as a cash flow investor, I guess when you bring that to your investor group and you say, Hey, cuz I know obviously a lot of people listening to this show raise capital and. When you bring it to your group, how do you underwrite it in such a way that it becomes still a compelling investment?
And yet, if you're positioning yourself only to really clip the coupon, I guess, can you, does my question even make sense or am I just wandering here?
[00:14:45] Mark Khuri: No, you're good. You're good. So a couple things come to mind. You know, as far as underwriting goes you know, everyone's. Says, likes to say that, Oh, it's conservatively underrated.
It's so conservative. Yeah. If it was too conservative, you would never invest, by the way, So , there's always some type of assumption being built in that you hope will come true. Right. And so how do we look at that? I mean, I won't, won't go too deep into the details in lieu of time, but. We're obviously analyzing rent comps, we're analyzing sales comps.
We wanna make sure that our basis is very attractive and that we're getting a really good deal for some reason, whatever that reason may be. Right. There's usually a story behind every deal. And as far as rent comps, you know, what's the rent growth projection, right? Sam? This is a big one for us, has been for a number of years cuz rents have gone through the roof.
We don't expect that to continue. And so you have to look at those numbers and stress test them. That's the other big part of it. We stress test everything and so we'll even look and see like, Hey, what's break even occupancy? And assuming we get to that point and then are able to come back from it from a few after a few years and there's some catastrophic event, whatever it might be, how does that effectuate the return?
Exit cap rates a very big. We've been underwriting exit cap rate growth for many years on our deals. And that's anywhere from, call it 75 to 200 basis points, depending on how we want to underwrite that, what we're buying it at, et cetera. And so then we'll stress test that too. Hey, if cap rates go up by 50, a hundred basis points above that, whatever the number may be, where is that break even exit cap rate.
But then you're looking at the debt, right? That's usually what dictates the duration of a deal oftentimes. And so you want to be able to weather the storm and keep holding and continuing to cash flow. And so those are a lot of the, the variables that we're constantly looking at. Sam, I think it's prudent to be able to run the numbers a lot of different ways and, and stress test the deal
[00:16:36] Sam Wilson: absolutely. No, I like that. I absolutely like that. If you re reo, if I could rero rewind. I don't know. Mark Rewind. The last 17 years, what is one thing you feel like you've done really well that other investors and or active deal sponsor should emulate?
[00:16:52] Mark Khuri: well, I'm just thinking if it, if it's a deal level, so it's, it is probably gonna go back to when we won our first conversations together, Sam is.
Working with the right people. I'd say the best. The best and the best, and making sure you're creating a win-win. Can you, can you
[00:17:07] Sam Wilson: elaborate on that?
[00:17:08] Mark Khuri: Yeah, I mean, like we're, we're, we're in the partnership business, right? And so we rely on our operating partners to source and execute on the business plan, on the properties.
We're also relying on our investors to partner with us and, and, and invest with us. And so, it has to win. It has to be a win-win for both sides of the equation, right? So if we're gonna be responsible for investing into a deal, our operating partners relying on. To be there for the entire portion of that investment up front, the middle, the back end, right?
Sometimes we have consent rights, sometimes we're, you know, cog, ping, whatever the, the deal may be. And so it's a traditional partnership. And the same with our investors, right? They are expecting us to be able to execute on the business plan and provide them with the, the, the returns that we said we were going through, right?
Do as you say, and so, there has to be a win-win there where everyone is benefiting from the structure and the relationship.
[00:18:03] Sam Wilson: Yeah, absolutely. Absolutely. If there's one thing that you could do over and, or a mistake you can help our investors avoid altogether, anything come to mind.
[00:18:13] Mark Khuri: Yeah, I would say right now just be patient.
It's very hard to do, right? We're, we're all trying to grow and create wealth and create passive income. You don't wanna make a mistake, right? Warren Buffet's number rule number one rule is, but, Don't lose money, and right. Number two is, don't forget rule number one. Right? So you know that, that just keeps coming top of mind right now.
And things are so volatile, Sam, we don't know where things are going. And so be patient. Try and find opportunities where you, you know, the old hell adage, right? When you, you're done looking at it, you say, Wow, how could I not invest in this, Right? Instead of this could work.
[00:18:49] Sam Wilson: Right. Yeah, that's that's, that's sound advice.
I think for the times right now. The the gut level, Yeah, this is a great investment versus this could work. Those are two very different outcomes when you're reviewing a deal. So that's that's fantastic. Mark, thank you for taking the time to come on the show today. So certainly. Certainly a pleasure to have you back on.
I loved hearing your thoughts on affordable housing, how you guys are finding opportunities inside of that, the unique strategy you're using with getting tax tax exemptions the way you guys are partnering, the way you've, you've pivoted the way you hit pause in 2020. That's hard to do, especially, you know, when you guys, I'm sure have a, have a larger team.
You got many miles to feed and hitting the stop button and or pause button is that's a discipline. So certainly appreciate you sharing. Sharon with us here today. If our listeners wanna get in touch with you and learn more about you, Mark, what is the best way to do that?
[00:19:39] Mark Khuri: Yeah, my, my email, You can email me anytime.
It just go to info@smkcap.com. Our company name again is Smk Capital Management and our website has tons of information, some investment opportunities, examples. That's smkcap.com.
[00:19:57] Sam Wilson: Wonderful. Mark. Thank you again, sir. Certainly appreciate it.
[00:20:00] Mark Khuri: Thank you, Sam.