Announcer:
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.
Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host Charles Carillo. Today we have Max Sharkansky. Since 2005, Max has led the acquisition, renovation and disposition of over $800 million in mismanaged and distressed assets, primarily in multifamily. He started his real estate career as a Senior Associate at Marcus & Millichap in 2002.. So thank you so much for being on.
Max:
Thank you for having me great to be here.
Charles:
So give us a little background on yourself prior to getting involved with your, your own company right now.
Max:
Well I was born and raised in Los Angeles, California. Went to high school, college, did everything in LA, went to LMU graduated college. Once I was in college, I knew I wanted to be in real estate. I was in college during the time of the.com bust and a lot of that just didn’t feel right with what was going on in the stock market. And I really loved the idea of a tangible asset, which was the exact opposite of what dog homes were at that time, at least. And you know, you could see it, feel a touch it, and it just looked really cool and sexy and look at these beautiful high rises in the sky. Little little did, did I know that’s not what I was gonna be working on, but it just seemed really, really cool at the time.
Max:
So I started getting into real estate after college. I got into real estate at Marcus and Milich app got a job in their internship program and then became a broker. Once I was in brokerage, I started to, you know, look at some of the other guys in the office that were buying some deals and they were doing very, very well on them as were my clients, of course. And that’s where I wanted to be. Full-Time so my partner, Mitch and I started buying end of oh five, early oh six, he was on the debt side at HFF and he was the same thing. You know, he just, he didn’t want to be on the sell side forever. So we started buying and bought our first couple properties end of oh five continued of buying into oh six. And then we left in oh six hit the ground running and aggregated a small portfolio during the last cycle.
Max:
We were fortunate enough to have really good timing and sell it. So most of it in oh eight prior to the crash it wasn’t anything huge. It was pretty small portfolio, but we did sell it in time. And, and as we were selling, we changed our model from value, add multifamily to buying non-performing debt secured by multifamily. So as we were selling, we were calling banks. A lot of the originators we had been dealing with over the years had become asset managers mm-hmm <affirmative> and we were calling them to try to buy notes. It was a log jam the first year and a half or so the bid ask spread was just so huge. You know, we were trying to buy notes at like 60 cents on the dollar 65 cents on the dollar they ever trying to sell them for 97 cents on the dollar.
Max:
We would call them, they would practically hang up on us. And then, you know, once the really hit the fan in oh nine we, we bought our first few notes from a bank in LA and from there was just snowballed and we had a very active downturn during the GFC. We did about 20 deals about 15 of which were non-performing debt deals. And about another five R O deals. You know, at the time we were very, very competitive because a lot of the people buying notes were ex finance guys who were just, you know, their model was buy forec close, flip mm-hmm <affirmative>. Whereas we had a infrastructure in place with a crew and property management. So our model was buy fore, renovate, lease up and then sell. So we could get a lot more aggressive with what we were paying and we were able to buy a lot of deals. So we actually had a very successful downturn and then coming at, out of the downturn when the market cleared end of 12, early 2013, we picked off our last REO and we just went back to the value ad business. And now we’ve got a little over a couple thousand units in portfolio and we’ve probably done 5,000 plus units total. So yeah, here we are. I just, we just opened an office in Miami, Florida. I personally just moved to Miami three weeks ago today and really excited about the expansion.
Charles:
Nice. That’s awesome. It’s interesting. You said it took about well, like a year after for the banks actually to come the terms or the sellers to come terms that the market is pulled back. And I always find that, cause it happened to me in oh nine when I was buying properties and the deals didn’t come up until like end of oh nine. And I think at the end of oh eight, they were still like, oh, everything, you know, and I think in oh nine and early 2010, they came to terms like, oh yeah, this is, this is the only way we’re gonna be able to sell this is that we have to discount this and they’re accepting they’ll listen to you for even crazy offers you’re making and they’ll counter even crazy offers. So it was a very interesting time and wild time during those those years. But so after buying Oreos, how has your strategy kind of moved progressed to where we are now and what are you really focusing on now? Are you, I mean, most syndicate are really focused on doing light value ads. Obviously you guys have like a construction company, a management company, so you’re doing, I would imagine more heavy value add deals. Is that, is that correct?
Max:
That’s correct. That’s correct. That’s what we’ve done historically. You know, when I say historically, I mean, you know, since 20 12, 13 during the downturn, it was very heavy value add, I would say it was more opportunistic than value add because during that period, we were buying properties that were 40 50% occupied, heavily distressed just needed a full repositioning then come out of the downturn. You know, we went back to just a heavy value add model and we’re buying, you know, we’re buying product on the, we, we were buying on the west coast in very high rank growth markets that were going through a lot of change. So we were able to spend a lot of money on assets that had really been neglected and, you know, not actually just seemed neglected, but they hadn’t really been driving rents cuz there was so much change happening and so much rent growth and markets like they, for example, like the east bay where we were buying, you know, east bay used to be a sleepy suburban market. And what it had transformed into was a feed market into San Francisco with people that make six figure incomes, like most of our properties in the east bay today have average household income of six figures or very, very close to it. And that hadn’t been remotely close to being the case. So because you had such a strong demographic you were able to really reposition an asset, make it very, very nice and create almost, you know, your own asset class in between class B and class, a
Charles:
Interesting what type of debt are you guys getting on these heavier ads and these repositions
Max:
Traditionally it’s bridge. We had a really nice run in the last couple years with agency buying in and we still do continue to use agency, but right now it’s mostly on refis. Cap rates have compressed so much over the past. I would say 3, 4, 5 months that has unfortunately gone out the window with agency and you know, stuff trading at sub four cap going in. It’s very, very difficult right now for us, you know, on the heavy value, add stuff to buy with agency debt. We did just close one, but it was a newer vintage deal. That was a more light value add. So we, we can use agency debt with more light value add, but on the heavier value add stuff where you’re buying it sub four caps it’s bridge, you know, 70% low into cost. L three. Yeah.
Charles:
Okay. Interesting. Yeah. Yeah. So yeah, cuz you’re not usually on something like that, you’re probably not gonna be able to get agency with that heavy of a, of a rehab and they’re probably not even at 90% for 90 days on the occupancy front. Right, exactly. Yeah. So let’s you guys do a lot of these rehabs. I, how are you? Cause I get this question, I just got this question actually yesterday from someone I was speaking to and they’re planning out a rehab and making sure they’re not to over improve the assets. Now you’re going into these areas that are really gentrifying, like your east bay. What you’re talking about there, how do you kind of plan it out so you’re not over improving and is it just running and really like touring these comps or are you kind of going in and just as like being an outlier and you’re going in and kind of just saying we can push it because it demands there, like how do you de define kind of how we’re gonna finish it and how much we’re gonna put into each unit.
Max:
That’s a great question. While, you know, again, these areas are going through such rapid change when you’re entering a new market, you really don’t know until you just do some old fashioned trial and error. So you go in, you have a certain budget for, let’s say, you know, a high Optane Reno and you’re gonna spend whatever it is, 15, $20,000 a unit in areas like the east bay. And you are going you to, let’s say, you know, quote unquote, over, improve it in the beginning to see if you are in fact over improving it. So you, you sample a few different specs of renovations and you’re able to charge premium rents for every dollar that you spend on renovations. Then you just roll with that, right? Mm-Hmm <affirmative>. So if you’re spending, for example, $20,000 a unit and you see that you’re getting a substantial premium over to what you’d be getting 12 to $13,000 a unit, then you roll with that renovation.
Max:
Or if it’s, you know, 12 to $13,000, a unit, $15,000 a unit versus something that’s seven or $8,000 a unit, which is what we’re doing right now in Sacramento, we bought a deal last year in Sacramento, we were thinking, you know, it was kind of be probably like a 10 to $12,000, a unit like nice renovation, but nothing too crazy. But we found that we been able to get a premium on that 13 to $17,000 a unit. And that’s a pretty wide range. And I, I give you that range because that includes a washer dryer mm-hmm <affirmative>. So, you know, that maximum renovation for that market, we found that there is a demand for it. So we’re continuing to do that. Yeah.
Charles:
So it’s like a trial and error and kind of like getting proof of concept on different finishes before you go through the whole property with them,
Max:
With the first property in that market.
Charles:
Right. So first property in the market. Okay. There you
Max:
Go. So like, yeah, exactly. So for like this deal, you know, we hadn’t bought in SA we haven’t bought anything in Sacramento in years and we bought that deal in SAC. And you know, now we know how that particular submarket of Sacramento to respond to the renovations. So, you know, moving forward, that’s what we’ll do as we acquire assets in that
Charles:
Area. Yeah. That makes sense. Because when you’re going into areas that are really you’re riding that gentrification wave you might say, you know, I’m driving through a neighborhood and this has been renovated. That’s been renovated. This is what they chose for doing finishes, but you might be a block or two away and it might be different. I mean, it might be a completely different how, you know, you might be going for the stainless steel and and granite versus something a little bit less expensive. Sounds like all yours are very high end, but when we’re working like in a, B minus B area, that’s a C plus area, that’s kind of stuff and questions that we have come up. But so you own a lot of these assets in tenant friendly states. Like I see a lot of Oregon see a lot of California. How are you maneuvering and owning and managing properties in these states, especially with what we’ve been going through here which is still continuing and in those states with these moratoriums,
Max:
Well, that’s part of the reason why we open a new office in Miami to cover a region of the country. That’s a little more business friendly. Mm-Hmm <affirmative> so, you know, here we are covering the Southeast Florida, Georgia, and the Carolinas and it’s just much more easier to operate here. So we don’t have to deal with, with a lot of those headaches. And, you know, when I say headaches, I don’t mean the ex just the existing regulations. It’s also moving of the goal posts, right? So, you know, the problem with California and Oregon, I’d say the main problem. And some of these markets, you know, like New York and some of these other markets is you just don’t know what they’re gonna do next. I’d say that’s the main risk is with the one stroke of the pen, everything changes. A lot of the regs that they’ve put in place over the past few years, like AB 1482 in California, and the rent stabilization in Oregon at the state level, we can work pretty well within that framework because, you know, California is five plus CPI, Oregon is seven plus CPI. So, you know, hypothetically speaking, if CPI is 3%, so Oregon, you can raise rents by 10 California, you can raise rents by eight. So on a hold of 2, 3, 4 years, you’re able to get to market. So that’s the, the hard part is just not knowing what they’re gonna do next. Yeah,
Charles:
Yeah. I, I could definitely see that. Yeah, because also they can take that what you just said for the accepted rent increase and they might shave off two points off that and overnight, and you don’t know, and now when you’re talking to investors, now you’ve added another year or two to the timetable of when you’re trying to achieve these rents for all the finishes and for all the work you’ve done. So I can see how that could be aggravating and to say the least
Max:
Yep, exactly. To say the least
Charles:
<Laugh>. So with your firm being, you have a vertically integrated firm you’re handling property management in house, you’re handling construction in house. How does, oh, as I spoke to other other operators before that have this, and usually it’s for more control or is this really adding this in, in house? Is it for an additional profit center or is it just so you can, you know, exactly what costs are? You have a better handle on that and you can kind of control the pro the project a little bit more hands on, I guess you would say
Max:
Absolutely. The latter. It had not been a profit center for us for years. In fact, we lost money because we always had a higher payroll than we did fees coming in from property management and construction management. It was really, you know, in terms of just like looking at the fee income, but the way we looked at it is okay, if we have great talent in house and we’re able to control cost efficiency, time efficiency, then we know we’ll ultimately have a higher NOI, we’ll have much better product and we’ll sell it for more. So everybody wins our LPs make more money. We generate a higher IRR. We of course then make a higher promote and that’ll cover all those costs, but we’ll, we will lose money along the way. So it was kind of sorta like a loss leader for us. Now that we’ve gotten more scale, I would say we probably breaking even more or less on the property management. Mm-Hmm, <affirmative> part of the business in terms of fees. But again, you know, it’s, it’s not just about the fees, it’s about the creation of value in the asset and getting the highest return possible for our investors.
Charles:
Okay. That’s a great answer. The so how is your investment strategy and criteria currently right now? I mean, after moving down and kind of focusing a lot on the Southeast, are you still focusing on similar B plus AMI assets? Have you kind of, has that transitioned at all? What are you guys really looking at? And what’s your criterion strategy down here in the Southeast?
Max:
So in California and Oregon, there’s a lot of seventies product mm-hmm <affirmative>. So we buy a ton of seventies on the west coast. Same with Colorado. We’re in Colorado as well. It’s a mix of seventies and eighties here in the Southeast. They’ve done a really great job over the years, just building and creating a lot of product. So here, we probably wouldn’t buy as much seventies, but there’s a ton of eighties and nineties and two thousands, and here they just kept building. So there’s a lot more to buy and a lot more, and there’s a lot more new product to buy. Am I say new? I mean like nineties in Newark. So we just got awarded our first deal in North Carolina and that was built in two phase of is 288 units built in two phases. Oh, 2 0 6. You don’t really have that on the west coast because in California, everything that was built between call it, you know, the.com bust oh one and the GFC oh 7 0 8 was really all condos.
Max:
They didn’t really build much for rent multifamily, so that doesn’t exist for us to buy. Whereas here they did, they built a ton of garden style for rent multifamily, and we’re able to buy some product that’s a little bit more light value add, and we don’t have to worry about systems, plumbing, electrical, you know, everything is more up to date. We don’t have to change out old ZinCo panels where, you know, they can <affirmative> catch fire and you’ve got some life safety issues which, you know, makes value out here. I would say a little bit easier.
Charles:
Yeah. I can definitely see that. You’re not worrying about aluminum wiring. You’re not worrying about asbestos and lead paint and all this kind of fun stuff that happens with properties, seventies, sixties, and before. But <laugh> the yeah. Galvanized plumbing. That’s a huge thing out in California, too. I see it all the time when I talk to other developers out there, the what so when you’re, when you’re down here, cause I mean the Southeast loves the garden style apartments that’s for sure. So you have more than enough inventory to look at. What are some mistakes you see when you speak to other real estate investors?
Max:
Hmm. That’s a good question. I think something that you see and something I definitely saw on people doing a lot of business in LA in the, over the past 6, 7, 8 years is underwriting an exit cap that’s too low. I mean, now with what’s happened over the past six months, it doesn’t look as bad. It’s masked that mistake, but I saw a lot of guys do very poorly and let’s say, you know, 20 17, 20 10, 20 19, because they were buying a lot of rent control product and, you know, 14, 15, 16 thinking they’re gonna turn a lot of units and buyouts and do that whole thing and reten it and sell it for a four and a half cap. But they weren’t able to do that because a lot of the new product was selling it, you know, come on a four and a quarter. So why would somebody buy a 1960s renovated rent control product for four and a half? And they can go buy 2018 product for four and a quarter. And I saw a lot of those ultimately sit on the market for months and months and just trade for much higher prices because I’m sorry for much higher cap rates and lower prices because the, it wasn’t demand for fully renovated rent control, product and SoCal. Hmm.
Charles:
Interesting. when you were going through oh seven and oh six and oh eight. How did you kind of weather that you said you got rid of a lot of properties in oh seven, but I imagine you still had ownership in some properties going through what were some of the tactics said strategy you you utilized to get you through that that period.
Max:
So we sold most of it in oh eight. We had a couple properties trickle into oh nine which we ultimately sold also. So we didn’t have any legacy assets throughout the GFC other than, you know, call it the first quarter of 2009. And on those two properties, one of them, we actually sold at a profit because we had increased the NOI by so much. And then the second one, we sold at a small loss, but we didn’t have any investors in that deal. It was just me and my partner. So we, you know, we just lost a couple bucks on a deal that we owned on our own. And the way we looked at it is let’s just sell, even though we’re taking a loss, let’s just sell it cause that’ll free up the cash. Yeah. And allow us to buy non-performing debt in EO, which was much more high octane than just sitting on an asset for the next five years so that you don’t, you know, quote unquote, lose money on it and it show it doesn’t show poorly on your track record. So we didn’t care about that. That’s, that’s a small way of thinking and we just, you know, wanted to get the cash out and bring investment to something else which ultimately, you know, in <affirmative> retrospect was the smart thing to do.
Charles:
Yeah. That’s fantastic. I, I haven’t heard other people doing that before. Some people hold held all the way through, on the property that you increased the NOI on. Was it just a very heavy value add or was it really mismanaged or was it a mix of both? Both.
Max:
It was very, very heavy value add. It had low rents. We were able to improve the asset quite a bit and drove rent substantially.
Charles:
Yeah. So that’s great for any listeners if increasing NOI allows you. I imagine if he ever wanted to refinance that or anything like that, with that increase NOI, he adds value to the property and he has no problem, even if they scale back their loan to value on the refinancing. So that’s a, that’s a great to so max, what are some main factors that have contributed to your success over the years?
Max:
I would say taking calculated risks is huge. You know, I left a very well paying job at Marcus. You know, I was doing really, really well. My partner was doing fantastic at HFF and, and we started from scratch buying our own deals and, you know, ultimately scaling that business. And we took, you know, that, that was obviously, you know, a big risk mm-hmm, <affirmative> doing that. And then we took a lot of risk along the way and, you know, con continuing to scale and hiring more people and signing office leases with big rent and on space so that we can hire more and grow internally. And then breaking out of our comfort zone you know, 10, 12 years ago buying outside of SoCal. And then we started buying in NorCal and other secondary and tertiary markets. We started buying in Fresno and Sacramento, and then we started buying out state and, you know, that was a new risk for us. And we started buying in Oregon and then we started buying in some other markets and just, don’t be scared to break outta your comfort zone and grow
Charles:
Interesting.
Max:
I am today in Miami, you know, just, I took a risk three weeks ago and move my whole family to Miami. And we’re taking a risk with a new office here and, and a new staff and we’re hiring. We, we already made our first hire and we’re looking at employees three, four and five as well down here in, in Miami. So, you know, you gotta just continue to take that risk and scale.
Charles:
Nice. so how can our listeners learn more about you and your business max?
Max:
Well, you can go online. You go to try on properties.com actually right now, it’s try on hyphen properties.com and we’ve got a lot of education on the website. You can sign up as an investor, you can log in and create an account. I believe it’s the top center of the page would just change where that link is. So definitely create an account and be added to our distribution, and you could see all of our materials on what we’re buying and what we currently have out there, our fun, any new deals and learn, learn a lot about our company.
Charles:
Awesome. Well, thank you so much for coming on today and looking forward to connecting with you here in the near future, especially now that you are down here with me in Florida.
Max:
Yes. Great to be here. Thanks a lot for having me, Charles.
Charles:
Thank You.
Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.
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