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Episode 8 of Offshoot brings forward one of the “young guns” in the founding partner of Trion Properties, Max Sharkansky.
Trion is a value-add investor that finds mismanaged properties in top growth markets which they can turn around. Their historic focus has been the West Coast, though that has recently changed to include the southeast.
Max oversees all aspect of Trion’s business from acquisition, disposition, and property management to capital raises from lenders and equity partners, as well as the creation and management of their internal, discretionary, funds.
Since Trion’s 2006 founding Max has been involved in over $700MM of multifamily business, as a principal, and has captured average IRR returns that exceed 30%. Their equity funding comes primarily from a large roster of private investors that has grown organically as a result of years of success and word of mouth. At present, the firm owns 2,500 units, has 600 investors, and is on track for 10,000.
Max crushes it. He is the kind of guy that gets people saying “Man, what am I doing wrong with my life!?”
We go deep on some of the specifics of the multifamily space, and Max does a good job of portraying what it takes to execute at the highest level. He’s also got some great insights into personal performance, mentors, and relationships.
Listen for some of the highlights:
- Own real estate for the long term. Period.
- Trion bought assets right through the heart of the COVID pandemic by assessing the downside and staying committed to the long term, while others balked.
- You make the money on the buy.
- Do not over-leverage your holdings. (See what kills guys and don’t go there.)
- A reputation of “do what you say” and being easy to work with garners a lot of good will and brings acquisition opportunity.
- Why vertical integration with an In-house management and renovation team provides a competitive advantage.
- Hire the top talent and pay up for it. You might just reduce headcount by doing so, and you’ll get what you paid for. “Pay peanuts, and you get monkeys!”
- How crowdfunding improved their business and network.
- Get a mentor: it is smoother, more fun, and your career will be better.
- Think long term on all decisions and be more that fair with what the short term might ask of you.
- Take care of your health. It all starts there.
Transcript
Kevin Choquette:
Hello everyone. Thanks for joining me on episode eight of Offshoot, this episode brings forward one of the young guns in Max Sharkansky, the founding partner of Trion Properties. Trions value add investor that’s done a gangbusters bit job of growing since around 2006. They own 2500 units. They’ve done $700 million of business. They have 600 investors in their stable and are well on track to pick up a total of 10,000 units. They’ve also just expanded from the West Coast into the South East. And Max is really impressive individual when it comes to what he’s done coming out of commercial brokerage, and then becoming a principal on a value add investment platform. In the conversation, I think you’ll hear some really nice nuggets from him. Some of them come across as simple because we’ve heard them so much, but if you really listen, you’ll get the wisdom.
And at one being on real estate for the longterm, period. I mean, it says this in passing, but it probably can’t be overstated. Two, you make money on the buy. We all know that, but it’s the truth. Another one, he brings through is thinking long-term on decisions and making sure you’re fair to the longterm, even though the short-term expense might be a little asymmetrical or unfair, keep the big picture in mind. Anyway, Max and I have a great conversation. I hope you enjoy it. Thank you.
Hello everyone. Thank you for listening into my conversation with Max Sharkansky, the co-founder of Trion Properties. Max is a long time acquaintance of mine, who I met over a dozen years ago through one of his legal advisors, Tim Alt. Since that time he and his partner, Mitch Paskover have simply crushed it. Max oversees all aspects of the business from acquisition to disposition and property management to capital raises from lender and equity partners, as well as the creation of their own discretionary funds. Since founding Trion in 2006, as a principal, Max has been involved in over of $700 million, excuse me, of multi-family business and captured average IRR returns in excess of 30%. Trion is a value add investor that works on to find mismanaged or even distressed properties in the market that have favorable long-term growth trends. Their historic focus has been on the West Coast though that’s recently changed to include the Southeast, as Max has moved his wife and two boys from Los Angeles to Miami to capture that space. And as if that wasn’t enough, Max is also a partner of Continental Partners.
One of the leading mortgage banking platforms in the country, which perhaps not surprisingly has a particular strength in multi-family finance. Though, they also operate in industrial office, retail, and hospitality. So, not only is Max an operator, but he’s someone who knows the brokerage ecosystem and how to navigate it, which I suspect has a material impact on Trion success. Prior to co-founding Trion Properties and from 2002 to 2006, Max was a top ranking commercial real estate broker at Marcus and Millichap in Los Angeles. He also graduated from Loyola Marymount University in 2001 where he earned the bachelor’s in Business Administration with a focus in finance. To me, Max is one of those guys that can get people asking things like, “Man, what am I doing wrong with my life?” This guy’s killing it. So Max, well, I’d also like to know some of what I might be doing wrong with my life. Let me start with hello and welcome to the show.
Max Sharkansky:
Hi Kevin. Thank you for having me on. It’s great to be here.
Kevin Choquette:
Yeah, I really appreciate you taking the time to get us started could you just tell me and the audience a bit about yourself and Trion Properties?
Max Sharkansky:
Sure. My name is Max Sharkansky. I’m a managing partner and co-founder of Trion Properties. Born and raised in LA. As Kevin mentioned earlier, I just moved to Miami to launch and build an office here to cover the South East similar to the way that LA covers Western States. We’re in Colorado and California and Oregon. And I’ve looked at some other states, Denver west. Here we’ll be looking at… We’ll be covering Florida, Georgia, and the Carolinas. We were just awarded our first deal on our own contract on our first deal. And it is in North Carolina. We’re very excited about that and we will be growing our portfolio out here as well. So it’s an exciting opportunity. We have been in business since ’05, ’06. Prior to that, I was a broker. I was at Marcus and Millichap, went there straight out of college when I was 22 years old. Broker for around five years and my partner and I decided that we wanted to be on the principal side of the business.
He was in services as well. He was on the debt side of the business at HFF. And we were talking just said, “Hey, our clients are the ones making all the money. We’re doing great and this is super fun and we’re successful. And we’re making a couple bucks probably way more than we thought we would be making in our mid 20s. And none the less our clients were making significantly more than we were. So we said, “Hey, that seems to be where all the money’s made in real estate is owning the real estate.” It wasn’t exactly super outside the box thinking. So, we were young and didn’t have much going on in terms of obligations, personally, no mortgages or spouses and children and families that we had to worry about. So, we decided to make the jump and go into the principal side of the business.
We bought our first multi-family property in the San Fernando Valley for our first few [inaudible 00:06:40] general properties in the San Fernando Valley. I was brokering in the valley. So, that’s where I had access to off-market deals. I had access to market knowledge. So that’s where we started transacting and acquiring. And it snowballed from there. We bought our first couple of properties at the end of ’05. We continued buying into “06 and then we left at the end of ’06 and opened up our own shop. We aggregated a small portfolio in the last cycle. And then as things started to change nationally in the economy, we did see the writing on the wall and we decided to sell. So we sold everything. We sold almost everything in 2008 prior to the crash. And it’s not like we had a crystal ball, but things started to change.
The subprime lenders started to go under rents in our portfolios, started to dip after seven, eight and nine years of growth. Things started to go the other way with rent and with vacancy and just the economy in general. So, if you’re underwriting correctly and you’re underwriting honestly, where you’re underwriting negative growth for the next few years and the market still hasn’t changed, then you can’t make value out of work anymore. So we sold everything and we started calling banks to try to buy non-performing notes. As we were selling, it took us a while for our first closing, we didn’t buy our first few notes until 2009, because asset managers during that time who had been originated a lot of these loans, they weren’t really willing to sell much of a discount. We were calling on construction loans, which is where you saw the first default in 2008.
And they said, “Oh, we’re not going to sell you that for $0.65 on the dollar, that’s insulting. Will sell it to you for $0.97 on the dollar.” And our position was, “You’re crazy. You guys, aren’t seeing what’s happening yet.” So the bid ask spread was just massive. You could drive a truck through it and you couldn’t make anything work. You couldn’t transact. But in 2009, once everything had really collapsed is when banks lender servicers started to come to the table and we were able to consummate some deals. And we bought our first few notes in 2009. And again, from there, it snowballed and in 2009, ’10, ’11, ’12, during that entire period, we did not buy a single deal from a human being or a private organization. Everything was just banks, servicers, auction.com types. Even though we didn’t buy anything from auction.com, we did buy everything during that period in that capacity, buying it from a lender and then coming out of the downturn in late 2012 or early 2013, we went back to the value add business, all the distress cleared the market, and there was nothing left to buy.
So from there we built our portfolio and now we’ve got… Gosh, a little over half a billion in portfolio. Now, I’d say like $600 something million dollars in portfolio and we’re continuing to grow. So here we are.
Kevin Choquette:
That’s great. Thank you. And the assets that you guys bought through the note acquisitions, are those assets that you still hold today or were they all liquidated as you got them write it in and stabilized?
Max Sharkansky:
No, unfortunately we don’t any of those today. Otherwise we would have done very, very well on those, but that’s okay because we liquidated those and we recycled the capital. We built up our investor base and we really don’t own much from that period. Even, the ’13, ’14 period, we own a couple properties from back then and everything else we own even legacy is more from like ’15, ’16, ’17. We really don’t own much from that period at all.
Kevin Choquette:
And going back to your first comment on 2008, when you guys saw the handwriting and kudos to you for getting out. Because I don’t know that a lot of… Obviously a bunch of people didn’t because of what had happened, but if you look back and see that decision, was it a good decision from 2021 or do you wish you would’ve had a capacity to maybe hold on and see what those asset values are today?
Max Sharkansky:
That’s a good question. Look, I think in a perfect Utopian world, if we could hop in the DeLorean and go back in time, yes, sure. You just keep everything you can, right? Because real estate over the long haul goes in one direction, but where we were in our careers, we were still in our early 30s and we were a fairly young company with young principals and we didn’t have much of an infrastructure and much of a capital base. So, we had to sell a lot of those deals to recycle capital.
So, it really was almost unrealistic for us to keep any of that stuff because we have to recycle it to continue to buy more deals where we stand today, we’ve got 600 plus investors where back then we probably had 10 to 20 investors. So we couldn’t do that. We had to recycle and keep going. So, if that happened right now and we were coming out of a downturn with our current access to capital, yeah. We’d probably keep a lot more deals because we don’t have to sell right now. We don’t have to repatriate that same amount of capital. We can just refire maybe recap and stand and continue to buy more deals and continue to raise new capital for it.
Kevin Choquette:
In that 2009 to 2011 period you mentioned that all of your acquisitions were not principal to principal, you were dealing with some financial institution as COVID got started. And I should mention we’re kind of mid July, 2021. I think there was a lot of us who were prepared to do battle with the last battle, which was the great recession, Lehman Brothers, and the freezing of the capital markets. And I personally expected things to look somewhat familiar and similar to that, it’s proven to be the case that they didn’t surprise surprise but I wonder, have you guys seen… Do you think you will see any distressed debt opportunities as a result of COVID?
Max Sharkansky:
No, not in our space, not in multifamily, seemingly not in very many other asset classes as well. I mean, with retail’s had some issues prior to COVID with e-commerce and everything, but I don’t think there will be many COVID related defaults. The government did a nice job. However you want to look at it, especially in the beginning, CARES act. I don’t think there’s anybody, no matter what your political stripes or your political views are, they can argue with those initial couple of stimulus bills, whatever happened. This year, that’s up for debate, but the government did do a really good job.
I think that there’s no arguing that and was able to provide enough stimulus to where there wasn’t massive distress in the market. So we got through that, stuff reopened and rents… I can see in our portfolio, rents are pretty close to where they were in 2019 pre COVID on a lot of our portfolio. And I’d seen our Oregon portfolio they’re beyond where they were, same with Colorado, California is still recovering. So, no, you’re definitely not going to see any distress in multifamily and I doubt you’ll see it in many other asset classes either. You need something like the GFC to see prolonged distress.
Kevin Choquette:
Yeah. Agreed. And I personally invested in a distressed hospitality fund, which is just another way of saying what you said. My capital has been committed for over a year and there’s been no capital costs. So, even in hospitality where you’ve seen, just catastrophic fall off and occupancy and RevPAR, you’re still finding the banks playing along to get along if you will. And I haven’t personally heard of any real distress trades. I mean, I know there’s some that have sold $0.90 something on the dollar, but I haven’t seen anything clear. I don’t know. Have you guys seen anything in on the hospitality side that’s really been a remarkable trade?
Max Sharkansky:
We don’t really track that market to be honest, just whatever I’ve read in the Wall Street Journal. And if you look at where some of the publicly traded hospitality REITs are trading, they’re trading seemingly at a very large discount to NAV. So there’s probably a buying opportunity there.
Kevin Choquette:
Yeah.
Max Sharkansky:
And whatever has traded privately. Yeah. It seems like it has been traded at a discount, but it hasn’t been a lender foreclosing and then reselling it. You haven’t seen a whole lot of that. It’s just more private ownership selling it at a discount for whatever reason they have to sell it for. We did do some of that on the multifamily side, not distressed, but last year there was a window there of about three, four months where COVID hit in March. And I would say through about June, July, there were buying opportunities, very strong buying opportunities where we could get a discount of, 7% to 10% and 7% to 10%.
That’s about a 30 year equity. And we bought about five deals during that period. I mean, we had a very strong COVID because everybody went pencils down and everything that came to us off market and stuff that we hadn’t been working on in February, we were able to buy it very favorable basis. So everything that we bought in 2020, we bought about $150 million with a real estate in 2020. We’re going to just… Those are all going to be grand slam deals because we bought them at a very low basis. And in 2021, the market has just skyrocketed. So-
Kevin Choquette:
What allowed you guys to do that? I would say that I could understand the pencils down sentiment right there. And I think it was pretty widely held. Everybody was like, “Hey, let’s just pump the brakes and see where this thing’s going.” What allowed you guys to have the confidence to push forward and secure those discounts? I mean, in retrospect, it looks easy in the moment. Maybe it looks different.
Max Sharkansky:
Well, like you said, everybody went pencils down and we took a contrarian viewpoint and said, there are going to be some opportunities here. There’s nobody in the market. Everyone’s pencils down or close to everyone. We sent out an email to all of our investors. “Would you be interested in continuing to buy If we could find some grand slam opportunities? What we feel could be ransom opportunities over the long haul.” And we got a lot of responses saying, “Yes, we’ll buy.” We sent out a survey monkey poll to all of our investors. And I think 80%, 85% said they would continue to invest. And we took advantage of that. And we just underwrote some opportunities, very conservatively, assuming huge bad debt, declining rents, expanded cap rates. And we were still able to make it work. So, we ran some sensitivity analysis, assuming all those things and the deal still worked.
So we stayed in, we said, “Look, this is a pandemic. This isn’t a financial crisis. This isn’t a house of cards,” like the GFC, this in theory should be temporary. Like, how long could this really last? So, seemingly we were correct. And we bought some deals from some people that really got… They were concerned and they want to free up their own liquidity. So we were on the receiving end of those transactions and they’ll do fantastic. And that’s how we rationalized it that it’s temporary. It’s not long-term, it’s not going to be three, four years. It’s going to be a year or two tops and we’ll be out of this and it’ll be back to normal. So here we are.
Kevin Choquette:
Yeah. And underwriting to the downside and still feeling like it’s an acceptable outcome is a pretty, pretty rational response. Right? “Hey, stress this, stress this, stress this, do we still get there? Yeah. Okay. Let’s buy it.” That’s great. Congrats.
Max Sharkansky:
Yeah. Hey, kudos to RLPS from $50,000 check writers to $8 million check writers who said, “Yeah, you guys are onto something here, so let’s keep buying and we’re going to do very, very well.” Although, I don’t think anything we bought last year will be lower than a 20 IRR possibly, not lower than a 30, because we bought them so low.
Kevin Choquette:
Yeah. That’s great. So what’s happening in your business now? Where do you guys see and where are you seeing challenge?
Max Sharkansky:
Oh, there’s so much liquidity in the marketplace. It’s so competitive. We’re right now trying to expand in the South East where everybody wants to expand in the South East. Right? So it’s extremely competitive. You still get a little bit more yield than you do in the Western States, which is nice, but it’s very, very competitive. I think you’re seeing a lot of institutional capital flow out of office and retail into multi-family. I mean, I think if you look at Blackstone, Blackstone back in there, ’01 to ’08 heyday they bought, or I shouldn’t call them their heyday. That’s always their heyday but back in those days, there were like 30% to 50% allocated to office. And now there’s some 10%. So I think you’re seeing that across the board with a lot of institutions and that’s creating a lot of competition, even down where we’re buying the $20 million to $50 million range, we’re competing against a lot of those institutions that are buying that. People just don’t want to be buying off some retail as much as they were before, even your classic office retail operators.
And I know a lot of those names. I’m not going to mention them, but they’re now investing in multifamily and that’s making it very competitive. So, it’s a very competitive landscape. The good news is there’s a lot of opportunity in multifamily. America is still very under housed and the supply demand imbalance is creating a lot of rent growth. So, I guess we’ll see what happens over the next five years. You have a lot of cap rate compression from all of that liquidity in the marketplace, yet you have a lot of rank growth. So, let’s see how that shakes out in terms of returns over the next five years.
Kevin Choquette:
I would normally save this for later on, but it’s just a perfect segue. So I’m going to jump on it.
Max Sharkansky:
Yeah.
Kevin Choquette:
On my LinkedIn. So, first I’ll back up and credit Willy Walker with his Wednesday in a webinars, he had Peter Lindemann on, I think it was just last Wednesday. And I really like listening to Peter and they went through some of their assessments, macro economic assessments. And it had me go on to the fed. I think it was just Fred, right? Fred.gov, but the federal reserve data center and pulled up M1, the money supply. And I ended up throwing it on my LinkedIn. But if you look at a 60 year chart of monetary, well, I should just say M1 which is a specific measure of the most liquid capital in the marketplace. It has a nice call it 12% slope from left to right from say 1960 to the beginning of 2020. And then it literally is your classic hockey stick. And it just goes almost like 80 degrees up. And we’ve now got just way, way, way, way more capital in the marketplace than we have ever had. So while I get…
…Than we have ever had. So, while I get a lot of people are moving from asset class X and Y into industrial multi-family and I think that is its own phenomena, how do you…. You’re sort of saying like, “Look, the rents are going up, we’re still under housed. We like the bet. We’re going to go along. Where do you overlay? Oh my God. I think I heard 25% of the capital in circulation was printed in the last 12 months.” So where do you guys zoom out and start thinking about, “Okay, there’s literally a wall of capital out there.” How’s that going to impact your business?
PART 1 OF 4 ENDS [00:23:04]
Max Sharkansky:
We think it’s… That goes back into what we were talking about earlier, where that capital definitely is going to flow its way up into fund managers’ hands. And of course, it’s going to make multifamily that much more competitive. At the same time, you’re going to see a tremendous amount of rent growth because of all that additional money supply in the system. At least that’s our thesis. So we’re continuing to buy for that reason. It’s just we’re underwriting more aggressive rank growth also than we usually do because: A, because of COVID recovery, and B, because there’s so much money supply in the system. So we do think that’s going to translate into rent growth. How that affects middle and working class families, we’ll see, because the question is will their wage growth keep up with housing costs, and food costs, and gas costs, and everything else that people have to spend money on? I don’t know.
Kevin Choquette:
Right. You think we’re in inflationary period here or is this, as everyone’s sort of… I guess the big debate is inflationary, deflationary, transitory inflation. And I know this is fairly esoteric, but it seems so overlay well into kind of trying to figure out the big picture that supports your investment thesis.
Max Sharkansky:
Yes. We think it’s inflationary. We think it’s ridiculous when you hear some of these talking heads on cable news say, “Oh, there’s no inflation except for these five categories.” Well, those five categories make up 90% of personal consumption. So crazy to say there’s no inflation. So as far as we’re concerned, being in the rental housing business, which is a very large part of the way people live in America; I think it’s 40% right now. It’s going to be very inflationary over the next three to five years.
Kevin Choquette:
Yeah. I think it’s funny. You think you zoom out and you listen to that: “Inflation, excluding the highly volatile food and energy sectors.” So let’s see. The first thing you do is eat. The next thing you do is either heat your house or drive to work. So why the hell do we exclude that as a measure of inflation, but anyway, that’s…
Max Sharkansky:
How about paying your rent?
Kevin Choquette:
Right. [crosstalk 00:26:10] Go ahead.
Max Sharkansky:
Unless you’re a home owner with a fixed rate mortgage, then that doesn’t come into play, of course. The old joke is the best form of rent control is a fixed rate mortgage. And in that case, sure. You don’t have to worry about your housing costs if you’re just staying put. You do have to worry about it if you’re moving because there’s a lot of upward pressure on single family housing costs; but with rents, rents are going to go up. So we’ll see how that translates into economic growth or not.
Kevin Choquette:
Yep. So on the day-to-day, what is your… I gave the intro on the front end, but I pretty much pulled that out of LinkedIn and I don’t really know what you’re tasked with, but what is your day-to-day right now?
Max Sharkansky:
Well, it’s interesting right now, unlike it’s ever been because I’m really dealing with two coasts. And I’m on the east coast right now; I’ll be here for a while. So it’s a lot of east coast business in the morning and quiet time in the morning. And then the west coast starts to go crazy. And I get a lot of emails and calls between 12:30 PM and 7:00 PM here that are west coast related. So it’s a lot of acquisitions, asset management, general organizational growth, and doing that on two coasts. So very, very busy.
Kevin Choquette:
Yeah. It sounds like you’re wearing all the hats though.
Max Sharkansky:
Yeah. Well, we’ve got phenomenal acquisitions teams, and operations teams, and project management, staff, construction, accounting. So I’m dealing with those teams, but yes, I’m talking to all those folks on both sides of the country. So a lot of the times, go home, have dinner with the wife and kids, spend some time with them. And then at 9:00, 10:00 PM here, it’s still 6:00, 7:00 PM there, I’m able to do some work before I go to sleep. So it’s a lot.
Kevin Choquette:
Yeah. I can relate. You hinted at it a bit, but I’d like to drill down on your current investment targets. Geographically, we just touched that you guys are moving into Florida, Georgia, and the Carolinas. And I know you’ve been largely Denver west prior to that, but what about unit counts, class A, class B, class C, duration of investment. What’s the sweet spot. I’m sure there’s a reasonably wide strike zone, but what’s it look like for you guys today?
Max Sharkansky:
So, with everything we have in contract right now, we’re at about 2,500 units, it’s worth about 2200 with a few hundred in contract. We’ve bought a few thousand more than that. We are looking to scale to 10,000 plus. We are, as I touched on geographically, we are in California. North California. South California. We just build really in South California, North California. We’re primarily in the east bay Sacramento doing value-add and we’re in Portland, Oregon. Also doing value-add in Colorado. Here. In the Southeast, we’re going to be in Florida, Georgia, South Carolina, North Carolina; buying our first deal in North Carolina. In terms of profile, traditionally, historically, we have bought seas in high growth, B to B-plus locations in first ring suburbs and some secondary markets. And we’ll take a C and turn it into a B. What we really try to do is have the best class B to B-plus asset in the marketplace or competitive with it.
If the asset doesn’t actually have the bones for it, then we’ll try to get as close as we can. And that’s what we’re doing here too. Here, we’ll probably be buying some stuff that’s a little bit newer because that’s just the nature of the beast here. They did a really good job here in the Southeast, constructing new multi-family properties post 1995, which you don’t see as much in the west coast. So like right now, what we’re buying into North Carolina was built 2002 to 2006, which here would be considered class B, which will value add to like a class B-plus, A-minus. I would say class A here is probably five years or younger.
Kevin Choquette:
Okay. Got it. And how do you guys typically finance your deals from acquisition and then on the downstream. Are you just doing bank debt? Are you doing debt fund, bridge debt? Are you doing the agencies and then pulling supplementals later? What’s that side of the business look for you?
Max Sharkansky:
The answer is yes.
Kevin Choquette:
Yes. Whichever makes sense.
Max Sharkansky:
All of the above. Just as a few examples, on this deal that we’re in contract on, it’s an assumption. You’re seeing a lot of assumptions out there. There are a lot of people who last year took advantage of the markets and put a lot of very cheap, fixed rate debt on stuff. But, now that the market has really taken off, they’re selling and you’ve got a lot of properties floating around out there with nine to 12 month old debt, and they want to sell. So we’re putting preferred equity subordinate to that, and that’ll get us… It’s low leveraged preferred equity. It’s still to about 70% of the total stack. We don’t like to over-lever our properties because that’s one of the ways, probably the sole way to get in trouble. So we don’t over-lever. We like to keep stuff financed at around 70% of the stock.
Sometimes we go a little higher, oftentimes we’ll go a little bit lower, but we want to be in that general zip code. Other stuff that we’ve bought over the last year… We did a lot of agency debt on acquisitions. We think the window on that may have closed because now cap rates are so low where it’s difficult to finance with agencies. So we’re looking if a property is free and clear of debt, we’re looking at a lot of debt funds, a lot of bank non-recourse bridge debt. So, that’s probably where we’re going to be in the next year. And then we’ll use agencies for the takeout. Definitely not supplementals. Even if we do finance with agency on the acquisition, we usually use floating rate debt. We don’t finance with fixed rate debt, unless it’s a very special circumstance, which we did one last year, we got amazing 2.7% debt, fixed for seven years, opens up to yield maintenance after year five.
Kevin Choquette:
And why do you guys typically go float, just for the open pre-pay?
Max Sharkansky:
Flexibility, correct.
Kevin Choquette:
Have you guys ever used HUD or considered HUD?
Max Sharkansky:
We have not. We’ve considered it. We’ve got a quote on one property and we wound up not using it. We’re not long-term fixed rate guys. It rarely makes sense for us. We are doing a recap right now on 12 properties. Our portfolio… We’ve got that out to market. So we may look at some fixed rate debt there, but we’ll see.
Kevin Choquette:
So let’s zoom out to one of the sound bits I threw out at the beginning. Your average IRR to investors over $700 million of acquisitions is above a 30%. I mean, a 30 IRR is an opportunistic return. So I think if we were to say, “You guys are among the best”, it would be an understatement. Certainly, when you think institutional investment people are always like, “Well, what quartile are you performing?” It’s almost certain that you guys are top quartile, if not top decile. So what in your view does it take to do that? I don’t know that there’s a lot of groups that are able to say that in value add, multi-family investment.
Max Sharkansky:
Yeah. So, thank you, I’m flattered. Our investor level returns it to roughly… Maybe they are 30. I think right now there were probably more 20 plus than 30 plus. Project level are definitely 30 plus. But either which way, yes, you’re probably right as top quartile, if not top decile, especially for our asset class. The old saying goes, “You make the money on the buy.” So we’re very careful about not over paying. So we like to get it at a favorable basis.
A lot of the times, we’re out there bidding, doing call for offers best and final. And a lot of the times we don’t win. But then oftentimes a deal will break down and you have a broken sales process and it’ll fall back to us. Or the brokers then see how we underwrite. They see how we write. They see how we look at the world. And we have a reputation and our marketplace says where we transact that we’re very easy to deal with. And, like you started with the call off with, where we know how to navigate the brokerage marketplace, because I used to be a broker. So we know you want to make their lives as easy as possible. And sellers’ lives as easy as possible because people talk and they want easy transaction. So we’ll go through transactions very quickly. Due diligence very quickly will make everyone’s life very easy. And we close a clean, quick deal. So I think that keeps off-market deals coming in. And we always have a very strong pipeline of off-market deals.
We also manage in house. So, in terms of acquisitions, that’s it. So we buy favorably. We don’t overpay. Number two, in terms of operations, a lot of our competitors outsource everything. They have that private equity model where they just buy stuff and then they hire property management firms and they outsource everything. And, in my opinion, that’s not… You’re not going to optimize your NOI if you’re outsourcing everything, and you’re not going to optimize your construction, and you’re just not optimizing. So we’re vertical; we’re in-house. We have property management in house, project management in house. And in the west coast, we have an in-house crew. We’re looking right now at building out a lot of that on the Southeast. I’m interviewing director of operations candidates to start building that out now. And that’s how you optimize NOI and you drive the value of the real estate. So, between all those things, you are able to get a fantastic return.
Kevin Choquette:
Yeah, I think it’s great. In fact, you literally just hit on five or six things that I was planning to ask you. So let’s talk about renovation costs. And when you say you have in-house management, it sounds like you have in-house renovation. Some of the guys I know in the value add multi-family space get pretty creative about controlling costs. So it could be containers of cabinets and countertops coming from China, or it could even go as far as starting a wholesale/distribution company that’s picking up those skews at an ultra low cost and then passing them on to other companies like Tryon, right? Like, “Hey, if we’re going to buy 250 toilets, why don’t we buy 800 and we’ll sell them to our competitors in the marketplace and undercut the other sort of retail channels for renovation product, right? As opposed to home Depot and the like.” So, in that slice of your business, how do you guys control renovation costs?
Max Sharkansky:
Great relationships with vendors. We are able to get a lot of materials. I think we’ve had a huge value add to our investors over the last year, because with the supply chain effectively breaking down over the last year, we have still been able to source supplies and people have sold to us and they know they’re going to get paid quickly. And we’re a great buyer of materials. And we have one property where we bought a new market, so we outsource of the management and we’re using Affirm. That’s one of the biggest in the nation that has some of the strongest relationships in the nation. And we were still able to procure much better than they were because we’re so hands-on, and we’re so scrappy with that. So we have a lot of materials, like you said. We do exactly what you said. We buy a lot of materials upfront. We buy at scale. We get discounts. We get phone calls when stuff is being marked down and we’ll buy at scale. And doing all these things translates to higher returns to our investors.
Kevin Choquette:
And then what about on the asset management side? And I will a hundred percent back you on your statement that a lot of the “institutional investors” will… Look, I’m going to oversimplify it, but at some level, that business is really akin to buying and selling stocks and bonds. And so the property level execution isn’t given as great of an eye of detail in terms of how much staffing goes there, what’s the right cost per unit per year, excluding property tax and insurance, and how much staff should we put on there? Is it a one person operation? Is it a five person operation? I see the small property managers, who are really servicing the middle market guys, pointing out that Greystar and their competitors are going to put five bodies on a job and just overstaff it so that the management company doesn’t have to do much and pass all that staffing through to the owners.
Where the small companies are like, “Look, we’re not putting anybody on there full time. We’re just going to manage it from the central office. We’ll keep your costs down.” Anyway, my point is, there’s a lot of slippage between gross revenue and NOI in the area of operating expenses. Now there obviously a huge portion of those are uncontrollables, but what’s your guys’ view in terms of why you brought it in-house, how you control costs, that whole channel.
Max Sharkansky:
It’s just that. When we bought our first property, we used third party management. It not good. We had a horrible experience. It’s just stuff you hear where like, “Yeah, you’re just not getting that first class treatment. You probably do a better job managing yourself.” And I don’t want [inaudible 00:41:01] the industry. There are some fantastic fee managers out there. Like I mentioned earlier on the call, we’ve outsourced a little bit in Colorado and we have one management company that is just spectacular. I would act as a reference for them. They’re amazing. They’ve got true institutional experience. And by that, I mean real experience where they actually operated the real estate and they just do an amazing job. And others don’t.
So we had that experience where we had a bad experience and we said, “Hey, let’s just do this ourselves.” And it also kind of seemed like a head-scratcher to us. Our industry, unlike most other industries in America, why are people outsourcing operations? It just seemed logical that you would do it better if you do it in house. So, that was our thesis from the beginning. And I think that thesis proved correct. So yeah, here we are. We have a fantastic operation, a fantastic infrastructure. We’ve got great people and we do a great job for our investors with those properties.
Kevin Choquette:
I’m going to go a little bit deep here because I think the audience here can bear it. And I’m certain that you’ve got the sort of technical aptitude. Other income, right? So when we’re underwriting deals, there’s always a question of what ratio of EGI or gross rents is an appropriate ratio to be capturing in other income. And whether we’re talking about RUBS or pet rent, application fees, admin fees, month to month fees, late fees, bounce checks. So there’s a long menu of ways you can kind of monetize in excess of the monthly rent. I guess one, are you guys active in that part of monetizing an asset? And then two, what do you think is a reasonable underwrite in terms of a percentage?
Max Sharkansky:
It’s all over the board, man. I wish I could give you an answer, but, especially now where you’ve had a lot of states that have had moratoriums on late fees. Colorado, I think, just changed their whole law on late fees. They made it permanent where you can’t charge a late fee before a certain day of the month. RUBS… Again, every state has their own regulations on RUBS. In North Carolina, it’s illegal. You have to sub meter on water, but you’re allowed to bill back certain other utilities. Late fees… We’ll see what happens over the next few months with that in several different states.
I think for anybody buying right now, whether you’re buying a 10 unit building or a 500 unit property, a good practice is to look at 2019 financials because 2020 is going to have very odd ball… Or as T12. Right now, if you’re looking at T12 financials, it’s going to be odd because of COVID. So most of the stuff we’re looking at has very low other income. We looked at one property not too long ago that had very high other income because there were a lot of lease break fees because people were leaving the property and paying at least break fees. So other income was higher than historical. So we asked the seller and the broker to send us 2019 and 2018 financials. And it turned out that we were correct, that they were higher than they should have been because people were just leaving that market. So you really got to look at it on a market level. I would say for the most part, kind of portfolio wide, we’re probably 60 bucks other income, 60 bucks a unit per month, not including RUBS.
Kevin Choquette:
Okay. Yeah. And look, the reason I ask… You said, going back to some of the 2020 acquisitions, you might’ve saved seven or 10% on the asset price, which is significant, right? But going into an underperforming or more, probably appropriately, mismanaged asset, you might find other income is effectively zero. And you know there’s an opportunity to go in there and just bring a different ethos and operating standard to the relationship between the landlord and the tenant. And if you have six or 8% more revenue, you can put in a pro forma. It’s a big deal, right? Because that’s all going to drop to the bottom line. So it’s just in our business, underwriting deals, going to the capital markets, presenting a defensible, stabilized deal down costs that’s persuasive enough to get LP equity or preferred equity, like you just mentioned to move. All of these little marginal changes, and right now we’re just talking to other income. They have a huge impact.
Max Sharkansky:
They do. And let’s not forget that when you drop that other income straight into the bottom line,
When you drop that other income straight into the bottom line, it gets capitalized, right? And in our world and multifamily, you’re talking about four to five caps, right? Which is 20 to-
PART 2 OF 4 ENDS [00:46:04]
Kevin Choquette:
Twenty-five times. That’s right.
Max Sharkansky:
And that’s why real estate is a game of pennies because that income, every dollar of income has 20 bucks of value.
Kevin Choquette:
That’s right. Yeah. And then how about OPEX and I’ll get away from this super minutia stuff here in a minute, but here’s the rule of thumb that we, if I, if somebody said, “Hey, give me a good number.” I would tell you, and this is California based, plus or minus $4,500 per unit per year in OpEx. Plus, and this would be for newer projects, right, and I realize an older asset would have a higher number, plus property tax plus insurance. Right. And that’s a whole nother science here, right. When you’re coming into a new asset, you kind of got to go, okay, what’s, what’s my normalized OPEX, if I’m a best in class operator. I’m gathering based on what you just said about sort of being vertically integrated and not trusting operations to say gray star or even some mom and pop operation that you guys are pretty dialed in there. How do you guys think about underwriting, OPEX?
Max Sharkansky:
Kind of going back to what you said earlier. I think we do, I know we do, underwriting leaner than the management companies. We, but again, with really good management companies, it’s a conversation and they’ll agree with you or not agree with you and, they’ll experiment with you. But we tend to, I think we definitely tend to run it lean or [inaudible 00:47:50]. I shouldn’t even say as managing companies do, but let’s just say market. So, and a lot of people, they just kind of use industry standards for everything and they don’t really give it much thought outside that. So we’re able to do things. Let’s see, with payroll, we might use, we might hire one less person than our competitors would. But what we try to do is we try to hire the best people out there.
So we’re spending more money on quality. We might spend a little bit more on our onsite manager, or head leasing person for a particular property. And then we won’t need as many other people because the property is just performing very well. And those particular people in those roles are doing a fantastic job. So I think that’s a good way of looking at it is, let’s say you’ve got a 300 unit property and you’re normally doing three in three out. Maybe we’ll do two in, three out and we’ll spend more money on very, very talented, really, really good people. And you’re ultimately saving on personnel and renewals and leasing. So the property’s performing much better.
Kevin Choquette:
And when you’re saying three in three out, you’re saying three-
Max Sharkansky:
I’m sorry. Yes. I meant three in the leasing office, three out in maintenance. The shorthand slang vernacular for that is three in three out.
Kevin Choquette:
Yep. Got it. A little offshoot of this, but I suspect you guys have been exposed to it, maybe doing it. There are solar companies that are coming in and saying, hey, we can put basically an energy plant on your roof and you can get in between your tenant’s payment of a utility bill and the utility and make a nice rip by selling them green energy at a price that’s lower than your cost of production, and lower than what their utility bill would normally be. And then a similar model we’re seeing come forward is guys are bringing secure corner to corner WiFi, like kind of VPN, super secure, hardened wireless, to tenets, and saying, “Hey, you don’t need cable anymore. We’ll sell you gigabit wifi for 60 bucks a month.” Have you guys entered into any of those spaces where the relationship between the tenant and the landlord can expand beyond just providing shelter and charging rent?
Max Sharkansky:
No, we have not. Well, not in that specific case. We’ve done some package agreements with utility companies and try to, which that winds up being a win-win. Our residents oftentimes can get WiFi and utilities for less money and we get a door fee and some other ancillary income along the way.
Kevin Choquette:
Yep. Very familiar with that. All right. Changing topics, capital formation. You clearly have more or less done it all. I mean, you’ve bought or raised, however you want to think of it, capital from all the corners of the market from bridge, to perm debt, to pref equity, I don’t know if you’ve done proper mez, but I suspect so, and I know you’ve done JB equity. You’ve also started to raise your own discretionary funds. You can give us a bit on fund three, because I believe that’s where you’re active right now. But what has moved you guys in the direction of putting your own funds together?
Max Sharkansky:
Good question. The word you used earlier, discretionary. It just, it gives us much more ease of execution. So when we have that discretionary capital, we know we have it, it allows us to put up significant hard money day one. It allows us to confidently know that we can execute on an acquisition. And it also allows us to have an easier execution for all of our investors. You hear all the time as sponsors get over subscribed. This is a great way for sponsor, for our investors, not to miss out on deals. So we tell all of our high net worth investors or going to say accredited investors, that they should invest in our fund, and that way they get to participate in every deal.
A lot of people don’t like doing it for whatever reason, they like to have their own little version of investment committee. So, they like to cherry pick deals, which is fine, whatever. But when you invest in our fund, you get preferred economics versus going direct. You get automatic diversification. It’s just, it’s such a fantastic way for investors to invest. I’m a big fan of the fund model for investors for those reasons.
Kevin Choquette:
And are you guys raising from institutions or individuals?
Max Sharkansky:
Individuals. It’s a retail fund, high net worth investors, some family offices, some platforms for as long as some crowdfunding type platforms. But yes, it’s all human beings in our fund. It’s not institutions.
Kevin Choquette:
Yeah. You guys have had some success there, obviously. You’re saying you’ve got 2,500 units under control now, and I think I’ve got that, right? And targeting for 10,000. How have you been successful? Because aggregating capital, especially if you will, I’ll say onesie, twosie, right? But just getting out, starting with three investors to 30 to 100. Now you’re saying, I think you mentioned 600. How do you guys manage that?
Max Sharkansky:
Well, part of it is very organic, right? So we started out back in 2005, 2006, friends and family, just like everybody else pass the hat syndication. Right? I was at Marcus, Mitch was at HFF. You ask all your colleagues, you ask all your friends, you ask family, you literally call every single person in your iPhone phone book, and try to get to try to cobble together some equity. Then you bring a couple of deals full cycle. When you make people money or lose people money, word travels very fast. You start to get a lot of referrals and then you bring a few more deals full cycle. And then either friends of friends tell their friends, right? And then in 2011, I think it was the Jobs Act passed, and that was fantastic for our business. Crowdfunding became an industry in terms of private equity, crowdfunding, not like Go Fund me, but in terms of equity, crowdfunding, real estate, I believe has been the most successful.
And we were able to get a ton of investors online. And that really helped us to get from 50 to 60, to several hundred investors. And we have grown a compounded on that. We still raise money online. We work with the platforms we work directly. We do a lot of direct marketing with Google, Facebook and the such, and we continue to grow. So on the investor side of our business, which we haven’t really talked about much, but we do have a very robust investor relations and marketing platform. We continue to grow that out. And our goal is to be into the thousands of investors by the end of next year.
Kevin Choquette:
Yeah. And look, I don’t know if you are aware, but I had Ian Formigle from CrowdStreet on, I think episode four or something like that. I know you guys have a relationship with CrowdStreet. You just touched on Jobs Act and, sort of crowdfunding. I believe in one of our previous conversations, one of the attributes that you most enjoyed about those platforms was that you were putting up assets to raise capital, but you were gaining a relationship directly with that investor. And it wasn’t something that was sanitized or an anonymized if that’s a word by CrowdStreet. So I guess one is that correct? And then two, what’s your view of crowdfunding in general from here?
Max Sharkansky:
Well, that’s evolved, right? I think there were some, there are some platforms like CrowdStreet that originally just had a platform for dating almost for sponsors to meet investors. But then things change and became more of, these are our investors and, you can’t just have our investors, which makes sense from them, right? Because for the fee that a sponsor would pay to a crowdfunding platform to just take their investors, I don’t know that it was reasonable at that time. And now it makes a little bit more sense. So, there’s a tail on the investors, so whatever deal a sponsor works out with a crowdfunding platform usually has a tail of some sort. Does that answer your question?
Kevin Choquette:
Yeah, it does on that. I didn’t know that had changed. It’s smart, it makes sense that they would have caught on to well, maybe we shouldn’t just give all our investors still these great operators for free.
Max Sharkansky:
Or for a one-time fee, right there shouldn’t be-
Kevin Choquette:
Right that’s the right way to say it.
Max Sharkansky:
Yeah, exactly, exactly. We were paying them once and then we would get the investors and it worked fantastic for us, but it probably wasn’t the best business model for them.
Kevin Choquette:
For them, yeah, agreed. But then, so my question on crowdfunding going forward, I’ll hold back my opinions, but it’s 2021, crowdfunding has clearly grown up. I’m just curious what you think as we go forward, the vibrancy of the space, just your opinions on it as a whole.
Max Sharkansky:
I think it’s going to continue to grow. I think the cream has clearly risen to the top. There are only a few left, right? I don’t, I mean, are there more than a handful that we know names of off the top of our head? I doubt it.
Kevin Choquette:
No. Definitely not.
Max Sharkansky:
Yeah. So the cream has risen to the top and I think it’s only going to continue to grow. There are probably, there’s probably room for a few other new ones, in some ways that a lot of people haven’t thought about. Some groups that are very large in other parts of the investment world that are now entering crowdfunding that I’ve heard of that are very interesting and probably have a very strong angle into the business. And again, it’s only going to continue to grow as more accredited investors hear about it, they will participate in it because they’d be crazy not to. Over all those years, from effectively 1930, 1940 to 2010, they didn’t have access to investing in private real estate with great sponsors, unless you knew someone. That’s why for all those years, it was always called country club equity, because you literally had to be a member of a country club or know somebody who was to get access to these deals.
It was just such an opaque, antiquated way of doing business, separate from the rest of the world that didn’t have these crazy depression era regulations. So you’re going to continue to see growth, which you didn’t see before. And where a lot of these groups I can tell you firsthand, I mean, we talked to these guys all the time. And used to be they had a bandwidth to raise one or two million dollars, and now they’re raising 10 million or more, and that’s going to grow. And that’s really exciting for groups like us and young sponsors too. I think a lot of young sponsors that want to emerge, this will be a great way for them to emerge. They’d be crazy not to take advantage of it the way that we do.
Kevin Choquette:
Yeah. Look, I was involved in one of these ones, recently. CrowdStreet brought out a hotel conversion in Florida, actually a hotel to multi-family conversion. They were looking for nine million of LP. And I’ll also mention that I think the controls that the LP is granted in the overall operating agreement are, they’re not egregious relative to the LP, but if your LP was institutional, the latitude and sort of forgiveness, or I’ll just say latitude that the GP has given in those documents is significantly more than if you were partnering with say Goldman Sachs. But they’re raising nine million dollars. And in 24 hours, they had a $23 million commitment. So to your thing of the space is sort of maturing and, it kind of catching on. I mean, it’s remarkable to me to be honest, because those guys have deal, after deal, after deal that they’re putting up. And I don’t know that all of them were having that kind of success.
I do think there’s a bit of a gap in how well that sort of consumer LP the high net understands the business plan. If it’s right down the middle of the fairway, you’ll get a lot of interest. If it’s a little bit esoteric, I think it’s still a more difficult investment opportunity for them to sell on those platforms. But I definitely agree with you. It’s here to stay and it’s going to change things, not only for the operators, but for the retail investors. And that was the promise of it. I know you and I talked a bit years ago when it first came out, we knew the promise of it. It’s really cool to see, seven, eight years later, some of these platforms have really figured out the formula and they’re doing it.
Max Sharkansky:
Yep, absolutely. I think that first deal, that you and I ever discussed that we actually still own, we crowdfunded a very small part of that equity and we still own that deal to this date. I think that was 2013. That was probably one of the first real estate deals ever crowdfunded. It’s a deal we own in west LA in Culver City. We’ve refinanced it probably four times. Everybody’s got their capital back out and we’re into the promote on cashflow. So we’ll probably never sell it.
Kevin Choquette:
That’s great.
Max Sharkansky:
Yeah.
Kevin Choquette:
Well look we’ve been-
Max Sharkansky:
Now thinking of it at that time we were getting like six, 700 grand from websites and now it’s like you said, they’re hitting 20 million bucks.
Kevin Choquette:
Yeah, CrowdStreet in particular, I think their goal, and I think they’re going to well hit it, is to put out a billion dollars this year. Which is, I mean, it’s just amazing.
Max Sharkansky:
Amazing.
Kevin Choquette:
Yeah. So look, we’ve been doing a lot of, facts and figures, and talking about the business, the hard business, I’d love to just transition over to talking about you, your experience, your beliefs, your habits, your rituals. As I said, I alluded to a couple of times before, I think the performance of Chiron is exceptional. You have clearly made some decisions, have some vantage points and worldviews that are putting you in a class without a lot of peers. I’ll just say that. So if we can transition over there, maybe we just start with mentors. I’ve had a couple of great mentors in my life. How about for you? Have you had any mentors, anybody that stands out that kind of helped you get into this space and thrive the way that you have?
Max Sharkansky:
Yeah. I think first of all, any young people out there listening to this podcast definitely find a strong mentor. There is a lot of data out there, if you just want to look at the data on people who have had mentors versus not, you just, your career will do so much better, it’ll be so much smoother, you have more of a path. It’s just so much more focused and it’s much more pleasurable also to go day to day, when you have that guidance early in your career.
And yeah, I’ve had mentors. I had mentors when I was super young in the brokerage business, that’s Marcus’s model actually. They hire very young people and they give them strong mentors internally and mentor them along the way. And I had fantastic mentors there. And then coming out of that, getting into the principal side of the business, you just, kind of do it breakfast, lunch and dinner almost, as you’re talking to investors, you’re doing it with mentors too. Like other sponsors who have been doing it for many, many years and decades. And they tell you what’s been behind their success and their failures and mistakes and things they wish they would’ve done differently and things that they did very, very well. And it’s something that you’ve got to be constantly doing breakfast, lunch, and dinner.
Kevin Choquette:
Yeah. Agreed. You have a team, and apologies if these feel like they’re bouncing around a bit, but you guys have built a good sized team. I should ask how big is the team, sort of out in the field, managing the assets versus in office and sort of investor relations, asset management, project management, what’s that all look like now?
Max Sharkansky:
The operations team is both right? It’s corporate level and boots on the ground. So corporate level in LA, we have a handful of people we’re hiring one here now in Miami. We’ll see who that person will be, but we’ve got some fantastic candidates. And may I add, they’re not just from the Southeast. People do really want to come here from all over the country. And we are, there are some really, really strong people that we’re looking at. Then we’ve got a construction crew that’s been with us forever on the west coast. That’s probably, that fluctuates kind of like 10 to 18 people. And then of course, onsite managers, community directors, maintenance people probably about another 40 to 60 people there.
Kevin Choquette:
Okay, so a good sized team. Yeah-
Max Sharkansky:
A good sized team.
Kevin Choquette:
And people who have listened to this podcast a bit are going to recognize this question, but I was at a MIT educational thing. And one of the founders of Fitbit was there and somebody asked him “Well, aren’t you concerned about competing technologies?” And his answer was, “I’m not concerned about any technology. What keeps me up at night is competing teams.” Meaning it’s not the widget, it’s the people behind it. And you got, you guys have gone and built a team of call it plus, or minus 50 people. So your view of teams, you’ve alluded to some of it already and paying up, getting exceptional talent. But outside of that, what, how do you see the team impacting your success, triumphs, success?
Max Sharkansky:
You said it, you got to pay off, you’ve got to get great talent. I once heard the expression if you pay peanuts, you get monkeys. So-
Kevin Choquette:
I hadn’t heard that.
Max Sharkansky:
If you want to, there’s a range out there, no matter what position you’re hiring for, there’s a range out there. If you want to be at the bottom end of that range or below that range, you’re going to get bottom of the barrel of talent. And if you’re at the upper end of that range or outside of the upper end of that range, you’re going to get top level talent. And it’s that simple. As you’re talking to head hunters, we do use head hunters. We do some hiring directly, we do some hiring through head hunters, really depends on the position, but just look at the talent. Look at the feedback, look at the talent. When you say, for example, if a position is $100 to $125, and you’re paying $125 to $130, look at the talent and it’s going to be a big disparity. And I would highly recommend paying a little more because it’s going to have an exponential result on your business, whether you’re Fitbit or you’re just operating apartment buildings, you’re going to see a huge result.
Kevin Choquette:
Acquaintance of mine, Mark Moses, was Orange County, Residential Mortgage Operator, a big platform. One of the ones that I’m pretty sure imploded when all the others did in the great recession. His one mantra over and over and over, hire the smartest people in the world hire the smartest people in the world.
Max Sharkansky:
Yeah, we’ve, as any business, you improve on your processes, right? We’ve improved on our acquisition processes and operational processes. We’ve also improved our HR and hiring processes and we use cognitive assessments and personality assessments, and we do a lot more research and a lot more digging on every individual than we did before. Versus you interview somebody, you just interview somebody, it’s almost a personality test. And in terms of meaning, how you like their personality and interview. So there’s, you’re just heavily biased on how outgoing someone is and you’re hiring based on that. But now we do a lot more data. We do testing on Excel, testing and accounting for hiring an accountant, Excel if it’s an analyst.
… all testing and accounting, if we’re hiring an accountant, Excel if it’s an analyst, cognitive assessments, and I’m happy to share a lot of that with you offline or online, but you will want to hire the best people otherwise, you’re screwed.
PART 3 OF 4 ENDS [01:09:04]
Kevin Choquette:
I’m blanking right now on the Ray Dalio principles, his book, right? And he goes into great detail on the battery of tests that they’ll put into their potential employees to figure out who they are and what they are and how they communicate and how that is going to interface with the rest of the team. And it’s almost to the point where if you’re not using those tools, you’re really just kind of gambling because you can pull so much risk out. I agree with you. In an interview, no matter how skilled you are at it, personally, it feels like 50 50. You’ll get it right half the time. And when you get it right, it’s a huge win. Everybody knows it immediately. When you get it wrong, you’re just spending time trying to right the issue and eventually ends up in hopefully helping that person into a role where they’ll thrive. I don’t know. What do you feel any different in terms of your hit ratio?
Max Sharkansky:
It’s gotten better. I mean, yeah, it’s exactly like you said. You’re closer to a coin toss when it’s just an interview. I mean, of course, you hone in on those skills as well. And you have a little more of an instinct professionally on who might be good versus not, and that does improve, but once you get into testing and it’s just a whole other level. You know more of what you’re hiring. And look, those tests have flaws too of course. You can’t rely solely on those tests, but when you look at the whole picture, you’re going to get a much better team when you drill down more on every single part of that process.
Kevin Choquette:
So as far as your personal growth, I mean, just in the years, I’ve known you, it’s very clear, you’ve traveled a good distance. What kind of avenues do you have to continue growing or sharpening this as Kobe would say. Coaches, therapists, coursework, reading, conference attendance. Where do you go to level up your skills and whether that’s a hard skill or self-awareness and sort of personal improvement?
Max Sharkansky:
That’s a great question. I’ve never done executive coaching, proper paid for executive coaching. It’s more of what we discussed earlier with mentorship, going out with people that just are further ahead of us career wise or ahead of me career wise. I guess that’s something maybe long-term, I would look at. I have explored it to be honest, but haven’t actually clicked by now. I do a lot of reading. You mentioned Ray Dalio. I’ve read some books on HR, like what we discussed. There’s a lot of great books out there on hiring and teams. Read a great one earlier this year by Stanley McChrystal, General Stanley McChrystal. Team of Teams.
Kevin Choquette:
Team of Teams, yeah.
Max Sharkansky:
Team of Teams. That was recommended to me by a friend of mine that has a huge global organization with thousands of employees. And obviously he’s operating at a whole other level. And I thought that was a fantastic book, super insightful. So I think you can do things as simple as reading a book to as high-level as getting an executive coach. I think physically you have to be watching everything or doing everything you can to maximize your performance, just like an athlete. Watch what you eat, watch your weight, workout in the morning. I wake up super early. I wake up in the fives, I hit the gym. So, I try to stay in good shape. I’m at the same weight I was five, six, seven, eight years ago. And I think that’s a part of it. So your health, your mental health, education, and doing all those things to grow personally and professionally.
Kevin Choquette:
Yeah, that’s great. It’s funny. I think more than a couple of us have the affliction that when those who are close to us give us a bit of advice it may fall a bit on deaf ears and I’m laughing because the person who recommended Team of Teams to me is a General and he happens to be my brother. And I have yet to read it. So now that you’ve said it, I’ll probably pull it out. In fact, I think he gave it to me for Christmas so, that’s hilarious.
Max Sharkansky:
He’s a General?
Kevin Choquette:
Yeah. He’s a General. He’s a General in the Air Force.
Max Sharkansky:
Oh, wow. That’s amazing.
Kevin Choquette:
Yeah, it’s pretty cool. When he first hopped on the plane and sort of started that journey, I was, yeah, there goes my brother. I kind of figured he was going to be brainwashed. And as I’ve watched that whole career evolve, it’s very dynamic and rich and they put a ton of resource into those guys and they’re very skilled. And if there’s one thing I would say about it, it’s unfortunate that they don’t really realize how skilled they are outside of the context of the military. And they’ll all figure it out when they decide to come out, but it’s been fun to watch. But I know-
Max Sharkansky:
Oh, yeah. It’s amazing. It’s amazing. [crosstalk 01:14:23]
Kevin Choquette:
It is amazing. You had mentioned, sort of going back to, Hey, if there’s any younger listeners out there, find a mentor like me. It’s more fun. It’s easier. Your career’s going to do better. Any other ideas that you would share with the entrepreneurs that are tuned in that maybe could save them some of the blood, sweat, and tears that you’ve expended along the way?
Max Sharkansky:
In a more entrepreneurial role I would say always, always, always think about the long haul. Think about the ramifications long-term of every decision that you make. Write the check. If you’re ever kind of teetering on whether or not you should write that check, always err, on the side… meaning err on the side of being more fair to somebody across the table from you. If you’re in a negotiation with someone on something, whether it’s an investor or a vendor and you want to preserve that long-term relationship, don’t nickel and dime them. Kind of like what we were discussing with employees, that I think works in the entire ecosystem. Write that check. [Crosstalk 01:15:48]
Kevin Choquette:
Do you have an example of that? It sounds like you may have lived through that once or twice.
Max Sharkansky:
Sure. I’ve had on multiple occasions, a broker telling me, we’re buying something and something goes haywire at the 11th hour, whether it’s a shady act by the seller or something somewhere pops out of nowhere and it could cost you a significant amount of money or money that’s maybe seems material at the time, but it’s really not long-term. And the broker says, “I’ll open up my checkbook and let me participate in this,” or where a lot of other investors instinctually say, “Hey, why don’t you help me out with this? This isn’t my fault.” We’ll say, “No, no, no, it’s okay. We’ll take care of that cost. And we’re not going to go after your fee and your fee is your fee, and this isn’t your problem. So you shouldn’t have to participate in it.” So I think that is an example that you see often.
Kevin Choquette:
Yeah, that’s cool. So, what you’re saying is zoom out the thousand, ten thousand, fourteen thousand, hundred thousand, I don’t know what sort of digits we’re talking about here. In the big picture the relationship’s more valuable than making a big issue of what’s going to end up looking like a small amount of money.
Max Sharkansky:
Absolutely. Absolutely. Whether it’s a vendor or a broker or an investor. I can give you many examples that look just like that.
Kevin Choquette:
Like I said, we’re kind of moving around a little bit here, but in our industry and by that I mean real estate as a whole, I see individuals show up who have some unique vantage point that they’re able to exploit and create value. And it’s the fact that it’s unique that makes it valuable. And the example I’ll give you is a friend of mine in San Diego who’s a hotel guy and he happens to be very good at CAD, not like full architectural CAD, but he’s a developer and he’s very savvy in all aspects of development, from managing the contract with the general contractors to good design, building good teams, the interior design, the property management, everything. He’s just a top flight operator.
But where he’s really unique is that he does the building floor plans and the unit layouts. And so he’ll take a really constrained site and figure out, well, if the floor plan looks like this, I can probably get 16 units per floor. I can go up 18 floors. Yeah, I could pay this much. Just an example of a unique vantage point that gives him a distinct competitive advantage. I wonder if either, and I’m not asking for you to give the keys to the kingdom away here by any stretch. If you’ve had moments where you’ve seen stuff like that for yourself, or if you know others where you’ve seen, wow, I don’t know how he saw that, but he saw it. He exploited it and he’s clearly got a competitive advantage.
Max Sharkansky:
Well, I would say I can give you a couple of examples. I think the last year when everybody went pencils down and things, the world was upside down and we were out there in the marketplace buying. We had a couple of lenders outside of just agencies that we had done a lot of business with and have done great business with and they’re relationship lenders and our relationship with those lenders was strong, extremely, extremely strong. And they continued to lend to us even through COVID where a lot of lenders, most banks were pencils down through all of last year. And we had banks who lent to us during April, May, June of last year. Not really April because we weren’t closing it in April, but May June, July, August of last year we were getting bank loans in addition to agency loans. And that gave us… we discussed that internally. Hey guys, do you realize this is a competitive advantage that a lot of our competitors, especially in the middle market space, they can’t get debt other than agencies.
So because we had such strong relationships with our banks and again, we don’t nickel and dime them and grind them on pricing on coupons by a few basis points and origination fees. And we do right by them. And they did right by us when the time came and we had a very strong, competitive advantage. In terms of outside organizations, I would say organizations that do have a Sterling reputation, kind of like what we talked about when you make people’s lives easier and they know that you’re very, very strong and you have the ability to close, when it comes time to transact, that is a very strong, competitive advantage.
We’ve been in many best and finals where we’ve won deals, where it’s just the other groups are unknown groups. And they’ve told us eh, or they have a poor reputation and they say, “Look, we’d rather transact with you guys. Can you just do these couple things and we’ll give you guys the deal?” And we’ve gotten that deal.
I know it happens. I know we were recently in a best and final where they were calling us and texting us saying, “Can you guys please come up? We know you guys.” And we couldn’t anymore. We just had nothing left. We didn’t have any gas left in the tank. We couldn’t come up any more on price. We were multiple rounds into an invest in Ohio. We said, “We’re done. We just have nothing left.” And they said to us, “The seller would very much like to transact with you guys because they know you guys.” And the seller was even texting us directly and saying, “Hey, you guys are the best buyer. Can you come up otherwise, we have a fiduciary to our investors. We have to go with this significantly higher price.” We had no gas left in the tank. So having such a strong reputation allows you last look at deals and other stuff like that.
Kevin Choquette:
Yeah, that’s great. That’s really good. A couple of little rapid fire questions here. These might be kind of fun. And then we can start to wrap it up. I appreciate you taking all the time to be in the conversation for me and everybody who might be listening. What’s the smallest habit you have that makes the biggest difference? You might’ve already touched on it, but I’ll ask.
Max Sharkansky:
Health. You can’t possibly-
Kevin Choquette:
I thought you were going to say that too.
Max Sharkansky:
Yeah. You can’t possibly manage an organization and your family and all these different things and grow on multiple coasts and seven, eight, nine states if you’re not worried about yourself first. So I was actually just talking, having this conversation with somebody in the gym and there’s that weight where you just feel like you’re gliding on your feet and you kind of want to be at that weight as crazy as that sounds. It makes a difference. It makes a huge difference. You get through your day so much more effectively and you don’t have that sluggy feeling after lunch. And you’re just, you’re humming and you’re firing on all cylinders and it’s physical, it’s mental. And that’s the biggest difference for me.
Kevin Choquette:
I’m in a group, an executive group that meets every month and within say the last five years, I’ve started becoming one of these unfortunately middle-aged guys who wears Lycra on a bicycle, but I told all of them the benefits that have come to me from getting my fitness, age adjusted almost certainly as fit as I’ve ever been, outside of the fitness itself are so profound that if somebody could put it in a pill and sell it, I mean, people would honestly pay easily a hundred bucks a day to get what you’re talking about. And if people don’t get there on their own, it’s hard to get that through. But I’m glad you said it. I agree. I’m a plus one on taking care of yourself so you can do all the other stuff.
Max Sharkansky:
Yep. I also, I stopped eating meat years ago. I am a pescatarian. I only eat fish, vegetables, all that stuff. And that’s also a huge difference. So it’s not just being in the gym and exercising. It’s what you put in your body. And that has made a huge difference.
Kevin Choquette:
What about dairy, butter, things like that?
Max Sharkansky:
I do. I do limit it, but I do do it. And look, I eat out a lot too. You’re going out to business lunches, business dinners. People cook with dairy so that’s very difficult to avoid when you’re eating out a lot, but I do a lot less of it. And I do do a lot of eggs as an animal protein.
Kevin Choquette:
Fair enough. And then what’s the most common mistake that you see successful people making?
Max Sharkansky:
Would it be a stupid, boring answer to say the opposite of that? Getting super heavy and maybe drinking too much during the week, going out and having a couple glasses of wine too many and that affecting your following day? I think that that’s an easy one, right? Just the opposite, the exact opposite. But that’s, if you read any Charlie Munger, Warren Buffet, Munger says, “A lot of the stuff that we do is just figuring out what’s really stupid and avoiding those things.” So those are things that I would try to avoid.
I would say, professionally in our business over leverage, you look at guys who over the years, got killed, got killed. And that’s that Charlie Munger mental model is where do guys go to die. Just don’t go there. And I think over leveraging has been probably the number one way to die in this business, is going to these 90% loans, 85% loans and doing crazy things to financially engineer a return when, if, especially in our specific asset clause, multifamily, if you have low to moderate leverage, you will never, ever, ever get hurt. You might underperform on your return if there’s a macro recession, but you’re not going to get wiped out.
Kevin Choquette:
Right. Yeah. A hundred percent. So look, it’s mid 2021. You’ve just relocated. You got two boys, a wife, a brand new opportunity in the Southeast. Obviously that’s some of what’s on the horizon, but zooming out more, where are you guys headed? What’s Chiam and Max Sharkansky next three to five years?
Max Sharkansky:
Continue to grow the portfolio like we discussed. I’m really, really excited to be here. I did not think I’d be doing anything like this ever, but COVID changed a lot of people. It changed a lot of perspectives and it changed the world. It changed America. I think it’s changed, it’s amplified the demographic shift. We’ve already kind of, sort of been seeing if you’ve been watching that with people moving to the Sunbelt and just doing new things with remote work, whatever you think about that. And working in other parts of the country that aren’t LA, San Francisco and New York, and really excited to capture that growth. And be a part of that both personally, because here I am in the Sunbelt and professionally buying multi-family real estate to capture that rent growth. And excited to scale our organization into something that’s really large and exciting.
Kevin Choquette:
Yeah. That’s great. So the mic is yours. Anything else you want to share? Words of wisdom. You’ve done plenty of that, but if you want to say anything more have at it. If you want to share your email, website, phone number. I think it’s out there for posterity, so a word of caution, I guess potentially, but mic is yours for any kind of closing thought you might have. And again, I want to say thank you for taking the time. I really appreciate it Max.
Max Sharkansky:
Thank you for having me. It’s been a fantastic pod. I really, really appreciate it. Really enjoyed the conversation. If anybody wants to reach out, yeah, sure. Just email me [email protected] or shoot me a message on LinkedIn. What else? Any younger entrepreneurs out there, I would say take some risks. Don’t be risk averse. At some point in your career, you got to take some risks and that doesn’t necessarily mean going to start your own company and starting from scratch. You could be number employee one, two or three at a company. And we’ve got some people that have been with us for many, many years and they’re doing really, really well because now they get the piece of the up. So they are a part of ownership. So go take some risks. That is the best advice I would give for a young budding entrepreneur or real estate professional.
Kevin Choquette:
Excellent. Again, thank you Max. Thank you to the listeners. My production people are telling me that I should remind you if you enjoy this, hop on whatever you’re listening and drop a review. I guess that’s kind of the catalyst to growing the listenership. Again, thanks everyone. And Max, I’m sure we’ll be talking before too long.
Max Sharkansky:
Thank you. And if you want to go to the website it’s trion T R I O N properties.com. You can invest through there. You can look at our education, looking at our case studies. So please do visit trion-properties.com. Kevin, thank you so much. It’s been fantastic.
Kevin Choquette:
Thank you, Max.
