Max Sharkansky brokered for five years at Marcus & Millichap before he began buying real estate with his childhood best friend. Today, he specializes in value-add multifamily and serves as GP of 6,000 units across California, Oregon, Colorado, and the Southeast. In this episode, Max shares his formula for getting access to deals before they reach the institutional process, how current events are changing the way he underwrites and structures debt, and why he chooses not to veer away from the multifamily asset class.
Max Sharkansky | Real Estate Background
- Partner at Trion Properties, which invests in multifamily real estate, and specifically specializes in value-add projects.
- Portfolio: GP of 6,000 units
- Based in: Miami, FL
- Say hi to him at:
- All socials: @trionproperties
- Best Ever Book: Atomic Habits by James Clear
- Greatest lesson: Take risks and hire good people.
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Slocomb Reed: Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever Show. I'm Slocomb Reed and I'm here with Max Sharkansky. Max is joining us from Miami, Florida. He's a partner in Trion Properties which invests in value-add multifamily real estate. They have GP’d over 6,000 units thus far. Max, can you start us off with a little more about your background and what you're currently focused on?
Max Sharkansky: Sure. I started off at Marcus & Millichap as a broker straight out of college. Brokered for five years and then started buying with my childhood best friend. We bought through the last cycle then we were fortunate to have good timing, we sold the portfolio in 2008 prior to the market crash. For the most part, we got out of the crash pretty much unscathed. We changed our strategy from value-add multifamily to buying non-performing debt secured by multifamily, as well as multifamily REO in 2009, 2010, 2011, 2012. During that period, we did not do a single deal with any private organizations or individuals. It was all bank service or lenders to distress at that time.
Coming out of the downturn, we went back to the value-add business and then we just grew very organically. We started growing up in deal size, went from 50 units to 100 units to 150+ units. Growing throughout the city of California, then started to hop borders. Went from California to Oregon to Colorado and then I moved to Miami to open an office here to cover the South-East.
Slocomb Reed: Nice. How many partners are there at Trion? And do you have a specialty within the partnership?
Max Sharkansky: Well, there are two founding partners and then there are people that have been with us over the years who are partners also and get profit participation. There are two of us. Was that your question?
Slocomb Reed: Yeah. You're one of the founding partners. Within your partnership, what's your focus?
Max Sharkansky: Acquisitions, dispositions, and some operations and construction. My partner oversees more of the finance aspect.
Slocomb Reed: Acquisitions, dispositions, and operations. Gotcha. So in what markets are you guys currently looking for deals?
Max Sharkansky: That's a great question. Our LA office covers California, Oregon, and Colorado. And California, we used to be very active in the East Bay. Up until COVID, we were extremely active. We picked off one deal on the East Bay during COVID, it's doing great. But we've been quiet on the East Bay with everything that's been going on with the Bay Area. We have been very active in Sacramento because there's been a tremendous amount of growth with people moving out of the Bay Area and into Sacramento, so we've just done great there. In Oregon, we're in the Portland MSA but not in downtown or close in Eastside. We're on the west side and the burbs, so also a lot of growth.
Slocomb Reed: Max, before we move on here, I've got to ask, what doing well in buying in California looks like during COVID. As many apartment investors as I talked to, the trend is that everyone is going to Texas and the South-East. And most investors avoid investing in California for a handful of reasons that the vast majority of Best Ever listeners could list for me. What does success look like in California right now? What numbers are you buying on and why are you investing in California?
Max Sharkansky: Because there's a way to do it. We know the state very well. If you look at the headlines and you listen to the podcast and you just hear about California anecdotally, they say, "Oh, California exodus." And that's what you read about, and people are leaving, and they're going to Texas and Florida. A lot of that is true but there are a lot of migration patterns within California. So you've got people leaving LA, going to Orange County, San Diego, Inland Empire. You've got people leaving San Francisco in the Bay Area going to Sacramento. We've seen 15% year-over-year rent growth in Sacramento; we've crushed it. That's the play in California. That's how you make money in California.
Slocomb Reed: Gotcha. Respond to this contemporary argument here, Max. "Cap rates are so compressed right now, especially in places like Sacramento and the Bay Area, that there isn't any money to be made. Where's the money?"
Max Sharkansky: Cap rates are compressed really throughout the nation. If you look at the top 25 MSAs, Austin is probably more expensive than Manhattan and San Francisco. So the Bay Area California aren't particularly expensive in this day and age. They're like everything else. Sacramento, even less so. I would say actually, you can get some value there.
And how are we making money? There are bad operators in every market, or mediocre operators. We're owner-operators, we self-manage, we've got construction management in-house. Everything's in-house and we operate maniacally. We watch every dollar on both top line and bottom line, and we're going to drive NOI. So we try to buy off-market. If we don't, there's going to be an angle there, probably on a big value-add, or on a number that makes sense, or both. We drive NOI, and that's really the bottom line. Oftentimes, we're increasing NOI by 50%+.
Slocomb Reed: What size asset are you finding off-market?
Max Sharkansky: To put that into perspective, we've bought deals for $10 million, $20 million off-market, and we've bought $100 million deals off-market. We bought a $109 million deal last year off-market and we're in contract to buy one more right now for also $109 million off-market. So it happens.
Slocomb Reed: Gotcha. In the commercial space, on-market and off-market can mean different things to different people. When I think of off-market, I think that there are no brokers involved. You have a buyer that has gone direct to seller. Of course, there are attorneys involved, but there aren't any brokers and there aren't any commissions being paid. Is that the case with these $200+ million deals that you're talking about now?
Max Sharkansky: No. There were brokers involved, but it didn't run an institutional process, and that's how you maximize proceeds. You take the property out to market, you run tours, you do the call for offers, you do the best and final, you do the final best and final, you do the second final best and final. You squeeze them for every last penny and that's a marketed deal.
Slocomb Reed: Spoken like a true former Marcus & Millichap broker. [laughter] Okay, I get where you're coming from. These are still coming through brokers, but they're not going through the institutional process.
Max Sharkansky: Correct.
Slocomb Reed: That makes sense. That makes a lot more sense than what I was thinking, for sure. I'm an apartment owner-operator in Cincinnati. And when I say off-market, I typically mean I'm cold calling, I'm sending letters, and I'm getting people to respond, and I'm getting the seller on the phone with me, but also assets that are way smaller than what you're talking about.
Max Sharkansky: Right.
Slocomb Reed: But I do also have brokers who I am working with who are bringing me things and giving me the opportunity to write on things that are not going through the institutional process.
Max Sharkansky: That's it.
Slocomb Reed: Totally. Yeah, awesome. Okay, cool. That makes a lot of sense. The breadth and the length of your experience leads me to ask some really interesting questions, given what's happening in the economy and in the world today. But before we go to that, Max, let me ask... I want access to these off-market deals, too; I want brokers bringing me stuff, speaking on behalf of our Best Ever listeners, by the way. I want brokers bringing me stuff before it gets to the institutional process with the last call, the call for highest and best, the second call for highest and best. What have you done and what can I do in order to get access to deals like that?
Max Sharkansky: I'll give you the formula. As a former broker and a current buyer, first of all, you want to make yourself the best buyer on the planet Earth. You want to run a quick DD process, don't retrade unless you absolutely have to, but don't retrade. Go out there...
Slocomb Reed: You're talking about pre-offer due diligence then, right?
Max Sharkansky: Well, you should of course do some. Then after you do your real DD, don't come back for credit, and be a strong buyer. Unless, of course, you find something very material. If you find some knickknacks here and there, just don't worry about it and close it.
You want to write with very aggressive terms. Sometimes it requires some hard money upfront. And again, brand yourself as the best buyer in the market. The way you start doing that is you go out there, you participate in the processes with the final, and the best and final, and you buy a deal or two that way, and then your phone will start to ring. Because you're in the comps, those people will see your name, they see that you paid market for a deal or two, and your phone will start to ring.
Slocomb Reed: I'd like to transition this conversation, Max. You said that you have been through some market cycles. The vast majority of real estate investors that I know and that I get to interview on the Best Ever show have really been investing only in this market cycle. It's been a long one and it's been a highly profitable one. It's also been bullish for the last 12-ish years. We're recording in mid-May 2022.
Max, you have some experience dealing with recessions and bubbles in the past. Let's talk in concrete terms. I'm not as interested in your opinion about the future as I am in knowing if you're changing the way that you're underwriting deals right now, or you are changing the way that you are structuring debt, based on - let me use some hot button words here... Inflation, interest rates, Russia, Ukraine, local and global politics, supply chain issues. All the things that we're dealing with in the second quarter of 2022. Are they changing the way that you underwrite and the way that you structure debt?
Max Sharkansky: Yes. You can actually [unintelligible 00:11:24]. So for sponsors out there who are listening to this, you can go to websites like Chatham Financial and you can download the SOFR curve into Excel and upload it to your model. We're changing our SOFR curve weekly in our models. We're doing that.
Break: [00:11:40] - [00:13:27]
Slocomb Reed: Can you explain what the SOFR curve is and why you would apply it to your models?
Max Sharkansky: Of course. So SOFR is the index that was created to replace LIBOR. There is what's called a curve, and that is what markets are predicting the SOFR index will look like. It's not always accurate. Of course, it's not always accurate, people...
Slocomb Reed: What is the SOFR index?
Max Sharkansky: That's the index that was created a few years ago to replace LIBOR.
Slocomb Reed: So what are they indexing?
Max Sharkansky: The Fed Funds rate.
Slocomb Reed: Okay. So the purpose of the curve is to track predictions for where the federal funds rate is headed.
Max Sharkansky: Correct.
Slocomb Reed: Okay. So what you're doing is you're taking those models and that curve for projections on the future of the federal funds rate with the SOFR curve and you're super-imposing that on your own models. And what does that do for you right now, May of 2022?
Max Sharkansky: Well, what it's been doing the past couple of months is it's stressing the models. So your deals start to look a lot less attractive if you just don't change a single cell and you dump in that SOFR curve. And then of course you have to make other adjustments. We're also adjusting our exit cap, we're assuming higher interest rates, so we'll probably have slightly higher cap rates. Of course, these cap rates won't go up basis point for basis point with interest rates but they will go up and we make that adjustment.
But to be honest with you, we don't have to adjust it that much, because we're pretty conservative with exit caps to begin with, so there isn't a ton to adjust. And to be honest, the way we're doing it right now is, on some of these deals that are marketed, we're waiting to see just how they shake out. Brokers are guiding us to a certain number and we say, "Okay, that sounds really good," because that's a discount to where it was a month and a half ago, two months ago so that's part of the trip, too.
Slocomb Reed: Gotcha. When you said some of these marketed deals, you're waiting to see how they play out, you mean that you're not offering on them and you want to see what other people do?
Max Sharkansky: Sorry, that probably wasn't the best way to do it. We are offering on them, but we're waiting to see how they're being guided, I guess. So we get the email, we call the broker, the broker says, "We're guiding to this number." And we'll put that number into our model and we say, "Okay, that looks pretty good." We're looking at some right now in South Florida that are probably 10% off the high, off where they were two months ago if not more. They're looking very, very attractive.
Slocomb Reed: Why is that? Why is it in South Florida you're seeing a 10% effective discount from two months ago?
Max Sharkansky: In my opinion, the cap rates just got too low. People buying 80s and 90s product, a four cap, four and a quarter cap, untrended, was just too aggressive. We saw a lot of that. We didn't get involved in that. We're buying one right now actually that we did tie up in March before the big rate shock. But we're solving to a 4.9, 4.95 untrended, and we think we'll be fine, because we're going to get a lot of rent growth.
Slocomb Reed: Gotcha. Max, what I'm hearing you say about coming down 10% off the high two months ago, you're saying that cap rates got too compressed, so the natural response is that they would rebound a little bit higher so that there's actual profitability in deals for the purchaser.
That sounds to me like putting commercial real estate in a -- I don't want to say bubble, because I'm not talking about the bursting of a bubble to cause a recession. But that sounds like an argument that does not take into account factors outside of commercial real estate, like the Russian invasion of Ukraine, inflation, supply chain issues, the other things happening in the economy outside of commercial real estate. Are you seeing those things play a factor in what brokers are getting for deals right now? Or is it simply cap rates got too compressed, there was no profitability, so now we're seeing an uptrend to a place where buyers are actually willing to buy?
Max Sharkansky: I think you're seeing all those things. I think those macro factors absolutely play into pricing. And if you look at the pricing of multifamily and its adjustments - by the way, in some markets where we're in, we haven't even seen adjustments, but you're looking at those adjustments and all of those things come into account. For example, multifamily. Because of inflation - you brought up inflation - rents are still skyrocketing so the fundamentals are outstanding. You still have a shortage of housing and rent rolls reset. Not entire rent rolls before us, but an eighth of our rent rolls reset every month. We're just constantly getting increasing NOI. If you believe that inflation will continue, which of course it will, then you're going to have very strong rent growth.
Slocomb Reed: Are you changing the way that you look at debt at all right now, and the debt that you're looking to put on your deals?
Max Sharkansky: Yes, of course. We're using a little bit less debt. Again, we typically don't over-leverage, but we're definitely shaving a few percentage points off of our typical monthly cost.
Slocomb Reed: Gotcha. Yeah. What I'm hearing also and seeing for myself is that LTVs and LTCs are going from 20%-25% and the banks are forcing that. Are you taking it all the leverage is available, or are you saying that you're taking less now because of potential uncertainties?
Max Sharkansky: I'm seeing that we're taking a little bit less, because of potential uncertainties. And we'd rather go with the bank first as a debt fund in an environment like this, because we'll take a little bit less leverage and a lower spread with superior pricing and it allows you to weather the storm.
Slocomb Reed: Yeah, that makes a lot of sense. Let's compare 2022 to 2017. Five years ago, very different market, very different economy in 2017. Compared to 2017, are you now looking to lock in longer, shorter, or the same term based on your own underwriting and deal preferences?
Max Sharkansky: I would say the same, because we're typically using bridge debt, banks, or debt funds, and we try to get as much term as possible. If it's a three plus one plus one, then we make sure that that first extension does not have a test, so you'd have a de facto for your loan. Four years is usually long enough to get it in and out of any cycle.
Slocomb Reed: So what hold period are you underwriting to?
Max Sharkansky: Three years usually.
Slocomb Reed: Gotcha. So you guys are selling in three years?
Max Sharkansky: Yes.
Slocomb Reed: Okay, gotcha. That makes sense. Are you projecting now, May of 2022, for future acquisitions that you'll be in and out in three years and are you structuring your debt accordingly?
Max Sharkansky: Yes, correct. Oftentimes, we don't want to sell the deal coming up to maturity on the loan, so we'll refinance it in year two, especially with where our spreads are right now. If you've got a lot of loans from debt funds in your portfolio and you've got spreads at 320 over SOFR plus, then you're going to probably want to refi it as fast as possible.
Slocomb Reed: Gotcha. Well, Max, are you ready for the Best Ever lightning round?
Max Sharkansky: I am.
Slocomb Reed: Great. What is the Best Ever book you've recently read?
Max Sharkansky: I really enjoyed Atomic Habits by James Clear.
Slocomb Reed: What is your Best Ever way to give back?
Max Sharkansky: We do all kinds of stuff. Actually, we're doing something really interesting right now. We got a call from a friend of ours who said, "I know you guys are in the housing business and it's easy to write a check. But we've got some Ukrainian refugees that are in California." There's a very large community of Ukrainian immigrants in Sacramento where we happen to own a lot of units, so we're giving away some free units for a few months.
Slocomb Reed: Nice. That's awesome. In your commercial real estate investing career, Max, what is the biggest mistake you've made and what's the Best Ever lesson you've learned from it?
Max Sharkansky: Oh, man. I would say stick to what you know and stick to what you're good at. We do multifamily amazingly well. We've got the software for it, the people for it, the talent for it, the expertise. We know the ins and outs of it. Whenever I try to veer away from that, it's not always the best result. We have bought other asset classes coming out of the downturn, we bought some retail and office and some other stuff. And we did great on some, but there was one we did horribly on we lost money on it. And development also, we did okay on it. It had some winners and some just okay deals, but stick to what you know is the moral of the story.
Slocomb Reed: And you say that the times that you lost in other asset classes like retail, it is because of not having the expertise that you have in multifamily?
Max Sharkansky: Correct. Look, somebody once told me a saying and it's so true. "Sacrifice for the niche." We all have a niche. I just went through the reasons why multifamily is our niche. We've been doing it forever, we're fully built out for it, we have a multifamily platform.
People in retail, retail sponsors, they have relationships with retailers. We don't have that. We're at a disadvantage day one. We don't go to ICSC, we don't know the leasing brokers. Real estate people think it's a passive business. It is if you're an LP investing with a sponsor. But if you're a sponsor, you're an operator, it's an operating business and you've got to know the ins and outs of that business.
Slocomb Reed: Max, what is your Best Ever advice?
Max Sharkansky: Well, I'm assuming you get a lot of LPs, just passive investors. I would say, don't just bet on the horse, bet on the jockey. So when you're looking at deals, make sure to do a lot of DD on the sponsor. Look at their track record, see what they were doing during the GFC, during COVID, and make sure you have a great sponsor. Because I've seen great real estate be driven into the ground by horrible sponsors, horrible real estate be blossomed and sold at a huge profit by great sponsors.
Slocomb Reed: Gotcha. Where can people get in touch with you?
Max Sharkansky: Sure. Go to the website, trionproperties.com, or you can email me, email@example.com, and I'll put you in touch with our IR.
Slocomb Reed: Great, and those links are included in the show notes. Max, thank you, and Best Ever listeners, thank you as well. If you've gotten value out of this conversation, please subscribe to our show. Leave us a five-star review and share this with someone you know we can add value to through this episode. Thank you and have a Best Ever day.
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