January 29, 2023

JF3069: How to Produce Attractive, Risk-Adjusted Returns ft. Mark Khuri

Mark Khuri is the VP and co-founder of SMK Capital Management, a family-owned private equity firm that raises capital and partners with operators in apartments, mobile homes, self-storage, and ATMs. In this episode, Mark shares how he calculates risk adjustment as an operator and capital provider, which asset classes he plans to focus on most in 2023, and his tips for ensuring you’re entering into a strong partnership. 

New call-to-action

Mark Khuri | Real Estate Background

  • Say hi to him at: 
  • Greatest Lesson: Keep emotion out of investment decisions and look at best- and worst-case scenarios.



Click here to know more about our sponsors:


Reliant Capital







Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm here with Mark Khuri. Mark is joining us from Bend, Oregon. He is a VP and co-founder of SML Capital Management, a family-owned private equity firm that raises capital and partners with operators in apartments, mobile homes, self-storage, and ATMs. He's also a returning guest. He was on episode 1721 with Ryan Andrews, and himself, Mark Khuri. Current portfolio - in his 17 years of experience investing in commercial real estate he's been involved in deals valued over $1 billion in asset value, and he's managed over 60 partnerships with investors. Mark, can you tell us a little bit more about your background and what you're currently focused on?

Mark Khuri: Sure. Thanks, Slocomb. Yeah, I started out as a financial analyst in corporate America; a lot of spreadsheets, doing budgets and planning, some internal auditing, and started investing on the side; very active, Slocomb, like a lot of people began - you buy your first place, fix it up, cash out, do it again, that kind of thing... And started partnering with some family members while working; this is 2005 through 2010. We built a small portfolio, predominantly of distressed properties, Slocomb. At the time we were buying a lot of single family, small multifamily, boarded-up, REO, short sales, etc. all-cash. A lot of times the rehab costs was the same as the purchase price or greater... And selling them or holding them. And we decided in 2010 to expand, and created our company, SML Capital Management. The goal at the time, Slocomb, was really to just keep buying, but also to diversify.

We saw some interesting asset classes do well through the recession; there weren't a ton, but mobile home parks, self storage, some apartments were very much top of mind... And we wanted to start investing in those as well. So we did; we started out expanding our portfolio into those asset classes by partnering, learning, meeting a lot of folks that were specialists in those sectors, and we started growing our portfolio that way.

So yeah, today, fast-forward, we pretty much focus on a lot of the same asset classes; we are very much recession-resistant mindset. We believe that the future is quite uncertain, to say the least, looking ahead in 2023, and really try to position our capital that way.

Slocomb Reed: Mark, I introduced you as apartments, mobile homes, self storage and ATMs. When you all started to expand in 2010, 12-13 years ago - now we're recording at the beginning of 2023 - did you jump into all of those asset classes? Did that happen over time?

Mark Khuri: It happened over time. So we started out as an operating partner, Slocomb, which means we would source, underwrite, buy, finance, execute on the business plan, all in-house, A to Z, including picking the paint color and the tile finish etc. on rehabs, and we started expanding into other asset classes that I noted by partnering with other operating partners, and relying on them to execute on the business plan.

So we did that slowly, in synergy, and at the same time as doing our own deals as an operator. So that was a little bit of a test, to say the least... You're trusting and relying on others to do what's in your best interest. And so that took us time. We did one, did another, found a nice partnership, a pattern, kept going... And after several years, we looked at both business models, Slocomb, and realized that the risk-adjusted returns that we were getting by being more of a capital source, and providing our investor group with more diversification, different options, investments etc. was a more intriguing way to spread portfolio risk and grow our company. So that's really where we focused and continue to today.

Slocomb Reed: Mark, when someone with your length and breadth of experience talks about risk adjusted returns, and deciding how you're going to continue investing and investing other people's capital based on risk-adjusted equations, it compels me to ask - because I'm personally interested, as well as for our listeners - how is it that you were calculating your risk adjustment for the returns that you were seeing, being a capital provider or being an operator?

Mark Khuri: So there's a few buckets where we classify risk. The first is people risk. That's our operating partners; what is their track record, their experience, their ability to execute on the business plan? That's something we look almost that first, Slocomb , before deal metrics, because you can have the best deal, with the most conservative underwriting, but if you have the wrong people running it, you're likely not to succeed. So that's one bucket. The second, of course, is the deal itself, how its underwritten. That's adjusted slightly over time, but we really try and look for conservative assumptions. I know everybody says that, it sounds cliche, and if you're overly conservative, honestly, you just never invest. So there's a balancing act there, where what we try and do is really come out of underwriting on a deal with a lot of conviction that we're going to be able to meet or beat the projected returns. And not all the stars in the world have to align just to get to the projected return. So that's a big part of analyzing risk on a deal level, people aside.

And then of course, you want to look at local market, and what kind of trends are in favor and against the area that you're choosing to invest into. And then we look forward as well at the forecast and potential future of the market and the asset class, to see -- really one question we ask down the road in a certain asset and investment is "Do we think there's going to be more or less buyers for this property in 3, 5, 10 years, and why?" And again, trying to have conviction around a lot of these points of risks.

Obviously, we didn't discuss one of the biggest risks; it's very much talked about today, but debt is usually the number one risk in a lot of investments, other than potentially people. So very much analyzing that very closely. We try and look today at fixed rate debt; a lot of more long-term focus for us, 5 to 10-year holds, so we're not forced to be a seller at the wrong time. We focus a lot on income and then growth, in that order; and again, the real posture of being able to just sit and hold, and not sell when it's not the best time to do so. Those are some of the ways we analyze risk on a regular basis, Slocomb.

Slocomb Reed: I want to go back to the first thing you said, about estimating risk, because that's the one that stuck out to me the most. Let me talk about myself for a moment as a point of comparison. I'm an apartment owner-operator in Cincinnati, Ohio. Only in Cincinnati, Ohio, because however I calculate risk, I always feel like there is less risk involved when I am capable of having the onus of making the asset perform. If that makes sense. Obviously, there are macro factors involved in the market - the economy, inflation debt, to your point, as you said... But at the end of the day, if the buck stops with me, that feels less risky, in part to your people equation.

You were an operator, and you decided that there was less risk as an operator investing with other operators, as opposed to operating yourself. So that, for me, and probably for some of our listeners, would require a mental shift that I would love to hear more about how you made. How was it that you determined that investing with other operators was a better risk-adjusted return for you than continuing to operate yourself?

Mark Khuri: That decision was largely made kind of as an investor, Slocomb, which is what I am first, before an operator and before syndicator, private equity investment manager, is an investor. And so putting that hat on, how do you reduce risk, and your people risk, which is really what I think you're focusing a bit on... If you work with too few operators, you're not spreading out your risk far enough, in my view. And if you do too many, you may not have deep enough relationships with them to be able to really understand how they think, how they operate; if the market's going left and the business plan says to go right, can they adjust? Do they have your best interest in mind?

So from a risk standpoint, we find that being able to diversify and spread our people risk across different operators in different regions, and different asset classes, to us is a little bit more safe than putting more eggs in fewer baskets, if you will. So that's one way we look at it.

Slocomb Reed: Even if those are your baskets?

Mark Khuri: Yeah, listen... Try to take the bias out if you can; if you're an operator and you think you're better than everybody else - well, you're probably not. So if you're realistic, and realize that competition is probably healthy, and it will allow you to improve and become better because you're learning from others and seeing maybe where you've made mistakes, where they've made mistakes, and learning from them, and learning from each other - that's the best way in my view to continue to grow and do better for investors.

We also found, Slocomb , as our specialty was in distressed and single family and small multifamily, that a lot of the margin on those assets got squeezed through the run-up in the last 10 years. So risk was increasing, while return wasn't. So that was a big part of our focus too, is "Can we still produce risk-adjusted attractive returns for our investors consistently in the market that we're in today, for example, versus three, four or five years ago?", that kind of thing.

So that's part of our pivoting process too, was just to be able to really provide exciting opportunities that we've found would have a very high likelihood of continuing to be there, again, in another 3 to 5, 10 years.

Slocomb Reed: Mark, that makes a lot of sense. And I know that there are operators out there who are doing really exciting things, and frankly, operators that are better than me... I know that my hang-up is the belief that if it's to be, it's up to me, I'm hanging on to that [unintelligible 00:12:02.13] Based on your bio, Mark, there's something I want to touch on... But before I dive too deep into anything else, I do feel it is my obligation on behalf of our Best Ever listeners to ask you, given your experience, the variety of asset classes that you operate in, in commercial real estate, based on your analysis of what's happening in the economy right now, setting aside the "Which markets, are you going into" conversation, of the four asset classes we've mentioned, where do you expect to focus in 2023? Is it apartments, self storage, mobile home parks, ATMs, or is it something else?

Mark Khuri: Good question, Slocomb. So we analyze that all the time. I'll say this - we've invested personally and through our company in over a dozen different asset classes within real estate over the years. And we focus on them [unintelligible 00:13:03.21] and we have been, for five years straight now... Specifically because we find them to be very attractive from a return standpoint, we find them to be growing in demand for use from residents, and from investor buyers, who's our exit, who we're going to sell to. So they still are very much top of mind for us today. We're going to continue to invest in all of them. If you want me to dive in a bit more and share more like which one's first, and second, and third, I can give you some thoughts there as to what would we go into today, versus what maybe we would pause on.

Break: [00:13:44.02]

Slocomb Reed: Mark, I think that's my question here is what are you pausing on and what are you doubling down right now?

Mark Khuri: Right now we are very much focused on mobile home parks. They continue to be top of mind for us, Slocomb. We've consistently seen the affordable housing crisis in America grow the last several years, home affordability has only become harder and harder for folks, due to rising home prices, inflation, high interest rates, you name it. And so we have a huge crisis in this country, affordable housing crisis. Mobile home parks we feel are one of the best-positioned assets to weather that demand that we think is going to continue to grow for many, many years; it's a long-term trend. You have a very unique structure with mobile home parks that you don't find in most other asset classes, which is almost the scarcity of supply, and the moat that you have around the asset class from the inability to create new mobile home parks that are affordable. I mean, you can often find potential development deals and mobile home parks, but a lot of times the end product is not quite affordable for the resident.

So it's a unique asset class for a lot of reasons, it's top of mind for us today, and we're very much focused on it. Secondarily, I'd say apartments; we've done very well in in the apartment space for many years. Obviously, there's a lot of change in the marketplace today, with inflation, and the cost of debt skyrocketing in the past year or so... But you also still see very close, if not already above historically high occupancy rates.

Going back to the type of apartment in specific to think about, we've focused typically on middle income, workforce housing, and some affordable housing as well. So we're really looking at trying to supply to the local market a safe, amenity-driven apartment community that is afforded by the local community. So that's a big part of our focus in growth markets, and we'll continue to invest in apartments.

Self storage we've also done well in, for many years. The one attribute that storage I think tends to increased risk for us when compared to the other two asset classes is the ability to create new supply that competes with the existing. So if you're a storage resident or user, you're looking to find a place that's affordable and close to your home or your work, and you don't really care that much about the age of the asset, or how shiny and bright it is, or new... So you find that supply can increase quickly, it's very much sub-market-specific, so you have to know with very strong certainty what the pipeline is. There's new units coming online - how quickly and how much is it going to affect your existing operation.

So we're very much focused on these three assets, Slocomb, I'd say probably in that order that I just mentioned.

Slocomb Reed: Mobile home parks, then workforce housing, apartments in growing markets, and then self storage.

Mark Khuri: Yep.

Slocomb Reed: I feel, Mark, like there's a lot that I could ask about and a lot that I could learn from you personally. I know that our Best Ever listeners are along for that ride as well. One metric though, from your introduction, that stood out to me, the one that stood out to me the most was that you have managed over 60 partnerships with investors. Can you explain a little bit more to us what the nature of those 60 relationships has been?

Mark Khuri: Sure. Essentially, anytime we're raising capital from a group of investors into an entity, and that entity is going to invest in something - it could be a single asset, it could be a fund that we're creating where we're combining multiple assets with multiple operators, it could be short-term investment, it could be a long-term investment... That's essentially what we call a partnership, where our investors are relying on us to do as we said we were going to do, which is to perform according to the business plan, the budget, the financial projections. So that's how it's divided.

Slocomb Reed: And everything you just referenced is one of over 60 partnerships.

Mark Khuri: Yeah, anytime we create an investment where we're grouping capital together into an entity, that would be considered a partnership.

Slocomb Reed: Gotcha. I want to ask for advice on how to make sure you're entering into the right partnerships. I want my first question to be less broad; in particular, how can you know that you're going into business with the right partners before you receive funds, send funds or sign anything that's going to be a legally binding long-term?

Mark Khuri: I'll mention two thoughts, the first being an investor into our partnerships with SMK, and the second being us into in a partnership with another operator, because it kind of works both ways, and there's very similar processes, strategies that we use that we would advise others to use, too. So the first thought is, how do you know the people? It's very much a people business. How do you know them? Did you just stumble on them on an ad? Did you get referred to them by a family member who's been investing with them for two decades?
First introduction or how you get to know the folks is critical, we find today, to really making sure you can try and establish some trust with them. If you don't know them, and it's just a cold introduction, Slocomb , then my suggestion is take more time to get to know them. Find others that have worked with them for many years, and talk to several of them. Preferably, if you can do it without the partners knowing. So one way you can do that is go on LinkedIn, find out who they're connected to, reach out to them, "Hey, I saw you know Slocomb. Have you ever invested with him?" You can also of course ask for references, but we all understand that most of those references have agreed to be named there, and so there's a good way to do it outside of direct request.

So find out the people, what their background, have they ever lost money for investors? Why? What did they do? How did they handle it? Were they trying to hide it? Were they transparent? Do they write a check to help overcome some of that loss to their group? Really get to know them in that respect. What are they struggling with today in their portfolio? How are they handling it? How much transparency is there? You really want to be able to trust them. So the way you establish trust is by, for us, asking a lot of questions. It's verification of information, trust but verify, and at some point, you're going to have to test them. That's how we got started when we started trusting other operators, Slocomb , about 10 years ago. It was a lot of questions, it was a lot of referrals from people who had done well with them... And then we would trust them by giving them a little test - a small investment, see how they do. You never really know until you write the check, and then you can follow them for quarters or years and see how they communicate, see how they do on the business plan, the operation, the execution, and then continue to invest further if you're pleased. So that's a general process of how we look at things.

Slocomb Reed: I want to ask specifically about your more joint venture style partnerships, where you are partnering with someone else and both of you will end up with decision-making power on the partnership. Decision-making power about operations and asset, decisions about liquidity events and other major things. Obviously, doing your due diligence, vetting someone, making sure that if they have experienced loss, that they handled it the way that you want them to have handled it, making sure they've delivered, have some sort of reputation within your sphere, that's ideal as well, of course. Specific to partnerships where you know both you and the other partner or partners are going to continue to have decision-making power, how do you make sure that you are giving that power or sharing that power with the right people?

Mark Khuri: It takes a little bit of time and experience before you get to decision-making or consent rights, that kind of thing, Slocomb. So a lot of operating partners that we work with, they need to trust you too, right? They're not going to give you that kind of authority or rights and power and control without already having done a bunch of deals together. So it takes time to build up to that, and it takes experience. So how do you get to it - it's by doing and continuing to do and continuing to do, and being able to rely on each other as needed.

Each group should have different responsibilities, of course, and we tend to rely heavily on our operating partners for execution of the business plan. So we expect them to run the day to day operations, we expect them to ensure that we are maximizing operational efficiencies at the asset, that we are doing what's in everyone's best interests from an investor standpoint, and taking good care of us.

So if you start investing with a group and you start to feel like maybe they're not putting you first, and making sure they have your best interest first, you might not want to continue, right? And you may want to pause and wait and see. And so a lot of it is a learning process. It's working with people, Slocomb, it's a bit of an art, maybe a little bit less of a science, versus underwriting a spreadsheet... So it takes time, a lot of conversations, a lot of emails, a lot of boots on the ground, visiting the properties, see how they work, and integrate with their on-site asset managers and property managers, because they're really a nice team there that you want to be a part of. So that's some of the ways that we look at that.
When it comes to consent rights and things like that, it's not necessarily all that we do. We do partner with other operators where we don't have consent rights, and we're okay with that too, Slocomb. Again, we're relying on them to make decisions, but when we do have consent rights, it's usually for a couple reasons. One, we have a lot of experience with an operator, we've done well together, and/or we're writing a large equity check for the deal, so we can of course negotiate those types of terms together.

Slocomb Reed: That makes a lot of sense, Mark. Being that you are a returning guest, we're not going to do the lightning round... But I do want to ask, for our Best Ever listeners, what is your Best Ever advice?

Mark Khuri: Best Ever advice? Gosh, the first one you hear all the time is just try not to be emotional when you're making an investment decision. It's hard, I get it. We've been emotional, I've been emotional. You have an asset where you can change the outcome of its future manually by doing things, and that's what we like to do. But you have to treat it like a business. So I think for people starting out, treat it like a business, and keep the emotion out as much as you can.

Slocomb Reed: Excellent advice. Where can people get in touch with you?

Mark Khuri: Two ways. So our website is SMKcap.com. Again, our company name is SMK Capital Management. Also they can email us; I look at all the emails that comes to info [at] SMKcap.com.

Slocomb Reed: Those links are in the show notes. Mark, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this conversation as I know I have, please do subscribe to our show. Leave us a five star review and share this with a friend who you know we can add value to through our conversation today. Thank you, and have a best ever day.

Mark Khuri: Thanks, Slocomb.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means. 

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

    Get More CRE Investing Tips Right to Your Inbox