Insider Secrets Podcast Season 2, Episode 21

 Guest: Mike Zlotnik

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Guest Bio:

Mike Zlotnik

Currently CEO of TF Management Group LLC, Mike has been a real estate fund  manager since 2009. Mike is a retired software executive who began investing  in real estate in 2000.  

Today Mike manages a variety of funds, including the Tempo Growth Fund LLC  and the Tempo Opportunity Fund LLC.

Mike is known in real estate circles as “Big Mike” due to his stature, but more  importantly, he is known for his personal integrity and for having a keen  understanding of the financial aspects of successful real estate investing. 

Notably, Mike is a former political refugee from the USSR who is now an American  citizen and a patriot. He lives in Brooklyn, NY, with his wife and four children. 

Mike holds a Bachelor’s degree in Mathematics from Binghamton University.  Mike is a member of multiple real estate and investor mastermind groups  such as Collective Genius, Freedom Founders, Venture Alliance, CA Investors  (Private). Mike is an author of the book called: “How to choose a smart Real  Estate Investment Fund”, available on Amazon.com. He also has a Podcast “Big  Mike Fund” that can be found at BigMikeFund.com or on iTunes. 

SHOWNOTES

Key Takeaways

Real estate investment is not one size fits all; it’s essential to find a model that aligns with your values and business approach.

Operating virtually in real estate is not only feasible but can be advantageous, leveraging technology and avoiding physical constraints.

Mezzanine debt provides equity-like returns with a safer position, offering a bridge for deals facing challenges like rising interest rates.

Prudent preparation involves considering multiple scenarios, both optimistic and pessimistic, to navigate uncertainties in the market.

Lesson number one, diversify. Lesson number two, diversify in time.

Diversify among many dimensions of diversification. Where you invest location, who do you invest with, what kind of strategy.

Standout Quotes

“Numbers speak. I can tell you this. We have a significant portfolio of investments, and we monitor our investments, and numbers tell the story.” – Mike Zlotnik

“In multifamily space, the sweet spot is probably 200 to 400 doors. If you go into bigger scale, then your team has to be fit and right sized for that type of asset.” – Mike Zlotnik

“It’s mathematics. You have a higher probability of success if you are a vertically integrated sponsor versus a non-vertical. This is my opinion; different people have different opinions.” – Mike Zlotnik

“Property management companies work for a paycheck, whether they are successful or not, 5 percent more occupancy, 5 percent less occupancy for them is not a big deal. For you, it is.” – Mike Zlotnik

“Vertical integration in supply chain, purchasing power, construction, leasing, all makes a big difference. And at times I’ve seen even vertically integrated operators turn over property management to a third party, but the only deal was construction.” – Mike Zlotnik

Timeline

[03:26] Intro to episode guest

[05:16] One word that describes Mike personally and professionally.

[07:10] Let’s talk a little bit about your background, and what you’ve done and how you got into the investment field, and what that looks like for you today.

[13:05] Do you really like sponsors that are more vertically integrated or not?

[18:00] How’s your team set up? How’s your structure? How does your group operate?

[22:21] Is your team solely focused on raising capital, and what types of investors do you attract—individuals, family offices, or institutional funds?

[26:48] What’s your market outlook for the next 12-24 months amid current uncertainties?

Contact

Email: bigmikefund.com

TRANSCRIPT

Kristen: [00:00:00] Welcome to this edition of Insider Secrets, the weekly podcast that turns real estate investing goals into reality. Each show we interview guests who are seasoned real estate professionals, actively closing and managing real estate deals. Mike is the founder of My Core Intentions and would like to help you make your real estate investing dreams a reality.

Mike coaches you to buy investment real estate, creating short term cash flow and long term wealth. Your host and real estate coach, Mike Morawski, has more than 30 years of real estate investing and property management experience. Here’s your host, Mike.

Mike Morawski: Hey, good morning, everybody. I am glad that you’re here for sure. Hey, if you are new to the show, thanks for being here. I’m excited that you are participating. Hopefully somebody told you about us or you’ve been seeing some of our social media marketing.

And I know that we’re always trying to bring you [00:01:00] good, relevant content that’s going to help your multifamily journey, your investing journey. Whether you are doing acquisitions or you’re raising capital, whatever side of that equation you’re on, or what part of a team you participate in, we’re always bringing guests and content that’s going to help your business grow.

I’d like to ask you to do me a favor, if you would. If you’re on social media, just hit the like button. If you’re on YouTube this morning, watching this live, then please smash that subscribe button. So you get notified about new events coming up, new information that we’re putting out, always posting something every day that is going to help you gain that little piece of a golden nugget. That’s going to help your business grow a little bit more.

And as we wind down the year here and we start to get into the new year, I want to ask you what you’re looking at as far as goal setting. And [00:02:00] what you are doing to move next year forward a little bit more than maybe what you did this year. Were you able to achieve your goals? Did you make as many acquisitions as you thought you would? What held you back? Where did you need to gain some momentum maybe that you didn’t have this year? And where do you need to get that next year?

Hey, I just put out my 2024 business planning and goal setting guide. And I’d love for you to request from me that guide for yourself. So if you send me a DM, I will make sure that you get that guide sent out to you to help you walk through some of the steps of planning and the processes behind that. I use a business planning system, a 135 system that is really robust and really will help you take a look at how you set a goal and what you need to do to achieve that goal throughout the year.

And if I can help you in any way, [00:03:00] don’t hesitate to reach out. But as I said, shoot me a direct message, email me and I’ll get you that goal setting guide sent out to you here later today. This year, we’re going to start a whole series of webinars on a monthly basis where we’ll have panels of experts and we’ll be doing some training that will just give you those fundamentals and those systems that you need to grow your business.

All right, let’s kick this off this morning. Hey, I am excited about my guest this morning, Mike Zlotnik, he’s with TF Management Group LLC. He’s out of Brooklyn, New York, but they have a North American presence. And I’m really excited about this. Mike and I have had a little bit of a difficulty getting connected over the last month or so, trying to get on the books and keep a scheduled appointment.

Either it’s been me or it’s been him, but we haven’t been able to meet and finally we get the opportunity to meet. So let me bring him in. Mike, good morning. How are you?

Mike Zlotnik: Hey Mike. Great to see you. Thanks for having [00:04:00] me.

Mike Morawski: Yeah, you bet. I’m glad that you’re here. Hey, what’s the weather like in New York today?

Mike Zlotnik: I haven’t gone outside today, honestly. It’s as crazy as it sounds. I do my walk after business hours, so it’s probably getting colder and colder. The weather has been, it’s the season. It’s a little bit unpredictable, but it’s New York. It’s getting colder.

Mike Morawski: Yeah, I live in Chicago but I’ve been hanging out in Southern California the last few weeks and it’s nice out here for sure. And I know in Chicago, I was on the phone with somebody this morning, it was 20 degrees or something and they had snow over the weekend. Yeah, it’s that time of year. That’s for sure. We’re into the holidays, inclement weather.

Mike Zlotnik: Yeah, Southern California, it’s the most beautiful climate in the country. It’s both beautiful and pleasant. And Chicago, it gets cold. And, I’m in New York city, but I spent enough time upstate New York where it gets like Chicago, windy, cold snow. And, I certainly like that. I actually like that weather. Some people don’t like the weather. I’m totally good with cold weather.

Mike Morawski: Yeah, good for you. Hey, listen, as we get started, [00:05:00] one question I always ask my guests at the beginning of the show, and I always say I’m going to write a book on this and actually have started, but I just haven’t gotten to getting it wrapped up yet, but in one word, what best describes you personally and professionally?

Mike Zlotnik: Analytical. There’s no better way to describe it. I think that’s the right word. I’m a mathematician by education. I’m actually a chess master, and I excel really well in predictable fields where I can compute. So analytical skills is what I use and apply and involve life and personal journey and business journey.

Mike Morawski: Interesting. I love that, that you’re a mathematician by skill. In what we do on the multifamily side, the capital raising side. I’m sure that comes in handy for you.

Mike Zlotnik: For sure. It comes in the form of Excel. Nowadays Excel does all the formula, all the computation, but it’s a game of numbers. Obviously, a lot of what we do, we look at the [00:06:00] deals, we do a lot of analysis. And, that’s the basic foundation of finding a good deal, how do you know you’ve got a good deal? Until you analyze it, you can’t tell, right? Something looks pretty or something looks ugly and you don’t know if it’s a good deal. You can’t tell if it’s a good deal.

Mike Morawski: One of the things I always say is that math never lies. You can make it lie, it never lies if you tell the truth in the formulas.

Mike Zlotnik: Numbers speak. I can tell you this. We have a significant portfolio of investments and we monitor our investments and numbers tell the story. When you start seeing the numbers moving in a certain direction, when they’re getting better, nobody complains. But when the numbers start getting worse, immediately you get the message. So occupancy is moving in the wrong direction. Why? And then you start digging and you wait a minute, there was a problem with leasing manager.

They got a bunch of people who are not paying. So your economic occupancy is getting worse, but physical is getting better. Like these type of stories you start looking through and you got a bunch of non paying tenants. So occupancy by itself, physical [00:07:00] doesn’t mean anything if you don’t collect. So little things like this, you can, but it’s all data. The data speaks.

Mike Morawski: Yeah, it’s all in the data, that’s for sure. Mike, do this, let’s talk a little bit about your background. And what you’ve done and how you got into the investment field and what that looks like for you today?

Mike Zlotnik: So I’ll give you a really short version of a long story. So, came to the United States in 89, political refugee from the former Soviet Union, Republic of Moldova. Long, long, long, long time ago. US citizen, US patriot. I have a degree in mathematics. And, I spent a career, almost 15 years in technology.

And then I started investing in real estate passively in 2000 in New York city and realized that real estate can be a great investment asset class and you can do it passively. But, I found it to be a lot of fun to be a little more active. So as I kept doing passive investing, I always had the goal of one day waking up as a real estate investor.

So 2009, fast forward, my [00:08:00] career in technology kind of wrapped up. I was done. I had a very successful career, but I was tired and had an opportunity to go real estate full time. And we started our first fund in 2009 and the timing was almost impeccable. 2008 correction, we entered into the market that was good. Market was bad, but it was getting better. And from that perspective, we started doing a bunch of hard money loans, lending on deals, and then evolved over years into commercial real estate investing, multifamily, self storage, industrial, open air shopping, and other strategies.

And then we’ll look back and that’s my investment journey. And we launched multiple funds over time, income focused, growth focused, mixed strategy. And we’ve done a number of syndications in the last I don’t know, since 2000, we’ve actually done probably 70, 80 million of equity capital raised in syndications. Yeah, so it’s been a journey on the investing side.

Mike Morawski: Interesting. So talk a little bit about the size of your portfolio. It sounds like you got [00:09:00] a number of different asset classes that you work in. And do you segregate that out or do you look at it as a whole? How does that work for your group?

Mike Zlotnik: We have about 150 million assets in the management and raised capital. And it’s obviously some of it is leveraged with debt. Some of it is that we loaned some of that money out. Some of it is invested in primary debt, some in mezzanine debt, some in equity. That’s the size of it. That’s about 150 million and it’s across multiple funds, most of our funds are round about 25 million a piece. They are whatever the strategy of the fund and then single asset syndications we’ve done raises from lower end three, four million.

In some larger deals, we’ve raised 16 million into even a bigger deal. So some of the deals we participated in are large multifamily assets, the largest of them all. We have a 261 doors in Indianapolis. It was a $50 million raise. We raised into the deal about 14 million bucks into 50 million equity. So [00:10:00] it’s not a right or wrong, it’s just we like the partner on the deal and it was a large deal and it’s got its kind of beauty and a curse, right? It’s bold because it’s such a large deal. It’s a beauty. And because it’s such a large deal, it’s a curse because it’s a gigantic asset. There’s some challenges managing it.

Mike Morawski: Yeah. I think every deal is like that. It has its good side and its bad side, right?

Mike Zlotnik: Yeah. Listen, there’s no right or wrong, but I would say that in multifamily space, the sweet spot is probably 200 to 400 doors, and some people do a hundred and less. But two to four hundred doors, you can get a big enough deal, and if you are a competent operator, that’s a good enough size to execute and people who do smaller deals, there’s nothing wrong with that. And larger deals to just get, for one, you need obviously better financial capability to manage larger deals. But two, when you’re managing over a thousand doors, you’ve got a gigantic asset to manage and property management, leasing, all that becomes a beast.

And you gotta be set up and scaled for that type of operation. [00:11:00] That’s why if you’re set up and scaled for an asset that’s 200 to 400 doors, then you have to write comfortably in that space. If you go into bigger scale, then your team has to be fit and then right sized for that type of asset. I hope it makes sense. It’s just, you find your sweet spot and you do a lot of that.

Mike Morawski: Yeah, I like what you said. I’ve always said that the sweet spot in multifamily is right about 250 units and that seems to be a great place to participate in that arena. Are you vertically integrated with construction and property management or do you third party all that out?

Mike Zlotnik: We are capital allocators. That’s the best way to put it. We marry money and opportunity. So we partner with people who are vertically integrated sponsors. So we’re not a sponsor. We’ll do a co GP, we’ll raise capital for a deal through our network, but we will not operate the asset.

We haven’t had to do it. Maybe, never say never. So for today we are partnering with people who are operators who will go to the [00:12:00] asset, we’ll spend time there, we’ll support them, we’ll do whatever necessary, but we’re not going to be spending a ton of time in any given city dealing with the constructions, dealing with the supplies, all that stuff.

It’s not been our game. Our game has been more raised capital and partner with the right people who are experts in that field. And we become a big check writer for them or a meaningful check writer for them.

Mike Morawski: Yeah, it’s interesting. So you said something that caught my attention. You said you partner with sponsors that are vertically integrated. Is that the only type of sponsor you like? Here’s why I ask, right? In my past life, I vertically integrated and managed 7, 500 units. And I don’t know that I made any more money doing it that way versus third party management and then just being a really good asset manager.

I think, some of these deals are made and broken in the asset management piece. And if you are really paying attention to those numbers, like you [00:13:00] talked about a minute ago about, occupancy and economic collections in that. Do you really like sponsors that are more vertically integrated or not?

Mike Zlotnik: The answer is we definitely like more sponsors that are vertically integrated and I’ll explain to you why. I’ve seen both success stories and both failures. So here’s what happens. It’s mathematics. You have a higher probability of success if you are vertically integrated sponsor versus non vertical.

This is my opinion, the different opinion. I’ll tell you why. So folks who we consider vertically integrated, they usually buy materials from Asia in large volume and they go to properties. One of the biggest Success factors or success or failure factors is when you are in Phoenix and you’re running a property in Georgia.

You have to get on a flight to use third party property management. And, we’ve seen a lot more problems relative to success when people do that. They think they can buy 1, 000 miles away or 2, 000 miles away. Rely purely on third party property manager and these property management companies, they do well in the beginning.

It’s like a [00:14:00] dating one. Once the dating game is over, things get a little rough. So this has been my observation when you are, let’s just call ’em within few hour drive from all your assets. I like that. What I don’t like is, you have to hop on a plane, although, today’s world, you can go fly anywhere, but most people who we like, and it’s, again, this is part of the strategy.

Some vertical integration strategies doesn’t mean like this. If you go into open air shopping closets, we’ve seen people operate them perfectly fine a thousand miles away. It’s a different asset class, but for multifamily specifically. We do like vertical integration in the fuel. So it’s your cruise, construction cruise, especially if you do meaningful value add or significant value add.

If you do light value add and the property itself is newly built and you get a very confident leasing partner and they’re really good, maybe you can do that fine. But if you get it to value add and you have to be on the feet on the ground. You have to come out to the properties. We like twice a month.

Basically, if you show up at every property [00:15:00] twice a month. Now, there’s a month. You only show up once. It’s fine. But without it, the properties don’t get necessary attention. Property management companies start slacking off. They work for a paycheck, whether they are successful or not, 5 percent more occupancy, 5 percent less occupancy for them it’s not a big deal. For you, it is.

And details matter. So I would say vertical integration in supply chain, purchasing power, construction, leasing, all makes a big difference. And at times I’ve seen even vertically integrated operators turn over property management to a third party property manager, but the only deal was construction.

If they go to construction, that’s wonderful. If you can get a third party property manager to deal with, and they can do a better job with operations, that’s not a cardinal sin. But without vertical integration, I just see too many problems where people just can’t get the materials, the supply, the labor or the leasing the way they plan. On paper, it all sounds good. Then they start running into problems and I don’t know. [00:16:00] It’s my experience. Your experience may be different.

Mike Morawski: Yeah. No, I like that. And I like your perspective on that. And here’s the thing that I’ve realized, Mike, over 300 podcasts I’ve done in the last several years. And everybody’s got a different opinion. I don’t believe that this business is one size fits all. I think that you find a model that works best for you. It’s like right now I’m buying a deal from an operator that his system is suck all the cash out of the property, let all the maintenance, the necessary maintenance go to the wayside and then sell the deal.

And there’s a strategy behind that. I don’t like that. That’s not the way that I do business. That’s not, obviously not going to be the way you do business. But there’s a strategy behind that. So everybody has a different way of doing business or a different strategy that works best for their investors and their group. So it’s always interesting to get that other perspective.

Mike Zlotnik: Yeah, [00:17:00] agreed. No, no argument. Some people are bottom feeders. Some people want to operate like Warren Buffett, buy a property in a location that you will be happy to own for good, for a long time. I like particularly the strategies that have multi year time horizon.

Obviously we’ve seen a lot of volatility in the interest rate fluctuations and a lot of strategies have experienced, the word is volatility. Used to buy and refi and now it’s, I don’t know where we’re going to go from here, but having the ability to refi and hold for long term versus do whatever you need to do and flip, makes sense.

So to me as long as the real estate is fundamentally sound and as long as you have budgeted properly, you can do okay. And if you’ve got to take it, hold it a little longer, that’s fine. And some deals, you flip. But if you have option, whether to keep or to flip, it becomes a good option.

Mike Morawski: Yeah, for sure. When I introduced you into the show, I mentioned you have a North American presence. I think you have partners that are in Canada as well as the US. How’s your team set up? How’s [00:18:00] your structure? How does your group operate?

Mike Zlotnik: We’ve been doing this way pre COVID. Think about it for a second. We’ve operated virtually pre COVID. And then, one of our team members moved away in Montreal, Canada, and we’ve brought people on board. As I mentioned, Miami, Nevada, Texas, New Jersey, and so on. We just found that it’s very doable to operate in a virtual environment.

We’ve done it from the very beginning of time for us. And it works if you get the right motivated people. You can’t bring people who need constant guidance. So you need self starters. You need folks who can operate on goals and be measured based on the results. So in that environment, you could focus, you could do this virtually. It obviously saves a lot of money if you don’t need a physical presence.

All the technology is all there. The world is out there. There are virtual clouds. You could do, there’s Amazon cloud, there’s Google cloud, all this technology exists. So you could run a business today with full security in a virtual environment. [00:19:00] And in many ways, it’s safer. Google’s ability, or a number of other providers, their security is best of the best, if you think about it.

So I’ve seen too many small companies have their own security, and I come from this world. I come from the world of technology. And people get hacked, small organizations get hacked because they get local security and it’s not up to stuff. So from that perspective, you can operate a business completely virtually.

Real estate is easy to operate virtually. You could store all your files. All this stuff can be stored virtually in a cloud. The days of the filing cabinets or local server storage is, I don’t want to call it over. You could have a local server crash, the Google is not gonna crash. So saving your data in the cloud works a whole lot better.

That’s how we do it. I don’t know, this has always been since 2009, this is how we evaporated. So when Covid hit and people had a problem, they had to get away from office and go into virtual environment. That’s great. Awesome. And it took Covid to wake up to do this.

And now [00:20:00] people don’t want to go back. Think about it. A lot of companies, a lot of employees, they prefer to work from home. And the biggest challenge is for corporations to get non, let’s just call them non self starter rank and file employees to work from home. Because they’re not monitored.

They don’t know what they’re doing and they’re concerned. Can they be as productive working from home versus working in the office? Again, I live in Brooklyn. I used to commute to Manhattan, New York city. So one hour commute, you get on the subway, it takes you a while to get to the subway, then you get, it’s worth the drive.

So you have to spend an hour each day doing subway, or a bus, or driving a car, whatever it is, right? You’re taking two hours of your day. If you can prove that you can be productive, you can prove to your organization, and you can do work from home, save two hours a day. That’s a lot of time.

That’s almost 10 percent of your life. Additional two hours a day, 24 hours, 8%, whatever that it is, but it’s very valuable if you can operate in this kind of environment. Not for [00:21:00] everyone. Some organizations cannot, if you’re not sales floor. And you need to be surrounded by supervisors. You need to ask questions. We can do zoom. We can do virtual. It works.

Mike Morawski: Yeah, absolutely. A hundred percent. Being the size of your team, does everybody do a different job function?

Mike Zlotnik: We do have mostly senior people. As I said, we have some, what I don’t want to call them, but they’re not junior people. Let’s just call them self starters and they can work. They’re not out of college kids and it depends if you get a self start out of college kid, I’m sure we can plug them in. But most of our folks are sufficiently independent and sufficiently expert in their own field that we’re able to operate.

Yeah, we have different folks with different functions. And we also outsource quite a bit. In this virtual environment, we don’t do our own accounting. We use third party fund administration. So from that perspective, certain functions, if you outsource, you can operate just fine. And some people prefer to do it inside. And I can tell you this, if you are ever raised capital, you run a syndication or you run a fund of funds. You’re much better off in my view, using third [00:22:00] party administrators than in house. At least you don’t have Bernie Madoff situations where the books get cooked.

So it’s easier to sell to investors and easier to not just project, easier to deliver this independent information, independent financials that are produced by third party companies. So we liked it from the very beginning. We continue to do that just as an example.

Mike Morawski: Yeah, interesting. And does everybody on your team focused to raise capital? And is all the capital you raise, is it all small investor, personal investors, or is it family offices, institutional money? What type of capital are you raising out there?

Mike Zlotnik: So if we had everybody raising capital, I don’t know what kind of company would be, and it would be some kind of a chop shop selling stuff. We have to absolutely not. We have manager investor relations. You have me, I’m the CEO and founder and I also educate and the capital raising is not really, we don’t solicit the classic sense we educate, we build a relationship with folks and we have a deal they basically step in because they know us.

So capital raising [00:23:00] is a little different. It’s more of an educational leadership. It’s called Ace Authority Credibility Expertise. Once you develop that and people know who you are, when you have a deal, they’re attracted to you. So that’s the way I think of the capital raising.

We have a few different parts of the company. So we have asset management team, and that team includes portfolio asset management and underwriting. These folks spend time and energy looking at new deals, but most of the energy I spent on existing portfolio, existing deals, making sure that these deals progress.

And it’s not the same way as if we were an operator or a sponsor working on the properties. We manage investments. So we look at what we invested into, what financials operating plans look like. Are we in target, are we behind the target? So asset portfolio management and underwriting is a significant part of our operation.

And then we obviously also have some level of capital raising. And then we have a lot of outsourced third party functions such as accounting, tax work. So the team is really, if you think about this in [00:24:00] this business, they’re really only three functions. And function number one, you obviously identify people who you want to invest with.

This is from our perspective because of the capital allocator. So we spend time on building relationships, vetting, best of the breed operators who we want to work with. That’s basically people first, then two, we look at their deals. You look at what they have coming up and when we see a deal, we will negotiate the right terms.

If we write them a check. Especially if you’re a programmatic check writer, we often will step on their toes a little bit, try to get a little bit better terms. If we get them a bigger check, of course, we’ll look for better economics. And then on a capital raising front, it’s pretty straightforward.

If you’ve got a great deal, then you just marry money and opportunity and folks flow into the deal. And then the next part of the business, you just got to manage the portfolio. The first part is easy. You’ve got the deal with the people who you know, like and trust. You’ve got the investors, but the deals have to do well. In this environment, that’s the biggest, as we grow, we foresee that being bigger and bigger and [00:25:00] bigger.

Mike Morawski: So what are you working on these days? We’re kind of in a little bit of an uncertain market. What are you working on these days?

Mike Zlotnik: We’re working mostly in this environment on, we call it mezzanine debt, basically raising capital for deals we already know, we’ve already invested into, we are often equity participants, where the deal is a strong deal, it just needs a little more liquidity in this environment to get it to a point where it can actually exit or refi.

Rapidly risen interest rates have caused all kinds of issues, as you can imagine, and some of them have been fun and some have been no fun at all. So the plus side of high interest rate environment is that if you deploy capital into debt, you loan the money. You could charge high interest rates. So the returns on mass debt and primary debt have gone up.

For example, we do hard money loans. We used to charge 12%. Now we’re charging 14 percent in primary debt. But if you go into mezzanine debt, we could charge 18, 20%. So, the folks that do need [00:26:00] mezzanine debt are the folks that have either not executed business plan completely, or they’ve executed it well, but the spike interest rates put them in a position where they can’t refi, get enough money from the primary debt on a refi.

So we’ve seen deals where there’s a refi or primary debt, but they need some S debt until they get the property to a point where they can either sell it or in a few more years, refi again. So it’s a bridge money and that money is behind primary debt, but it’s ahead of the equity.

And as a result, it’s a safer position than equity. And it gets returned. The term is equity like return without taking equity like risk. That’s what we’re focused on right now. Equity like return without taking on equity like risk. And the way we find it in effectively is in mezzanine debt opportunities.

Mike Morawski: Yeah, that’s interesting. Where do you see the market headed? We’re kind of in some uncertain times right now. Where do you see the market headed in the next 12 months, 24 months?

Mike Zlotnik: Crystal ball question. I used to have one [00:27:00] broke and find another one for sale. You’ve heard that story before.

Mike Morawski: Yeah, absolutely.

Mike Zlotnik: All the things I’m going to say is obviously highly speculative in nature and can’t rely on this. My job is not even to predict the future, but we have to prepare for different possibilities. At the end of the day, you have to prepare for good, the bad, the ugly.

So if you look at the ugly scenario, we’ve got sticky inflation, we’ve got high interest rates for longer substantially, we got essentially a form of a stagflation, where the incomes grow slow, inflation is sticky, and the interest rates are high, and that’s an environment that’s probably going to put us in some kind of an ugly recession.

Although stagflations have never been long lived. So it’s a possibility, but kind of in one of these ugly scenarios, stagflation leads to a significant recession. As we know, economy is heavily leveraged with debt and debt is expensive now. So it’s going to create a lot of problem in the economy.

Consumer is staffed, whatever you want to call it. That’s a sort of an ugly scenario is that there’s the bad scenario where there’s a meaningful recession. We [00:28:00] don’t wind up in a severe recession, but the Fed is going to be essentially squeezed that they can’t really cut rates fast enough because the inflation is sticky.

So it’s between the ugly scenario and a hopefully decent scenario. So again, I’m describing a few different things and I’ll tell you where I believe we’re going to go. So stagflation is the worst turning into a bad recession. Then you’ve got a little bit sticky inflation, mild stagflation leading into some problems in the economy where we go into recession.

Fed starts easing. And we’ll wind up sort of 24 is going to be a difficult year for pretty much any multifamily player. And then 25, we’re going to start seeing recovery, it’s a classic, probably middle of the road type of a projection. And then, let’s just call them a nicer projection where the good projection is that inflation data softens way faster. Fed starts cutting, what’s holding them back from reversing the strategy?

They’re still saying that they can hike, but I [00:29:00] don’t think they’re actually realistic. We’re recording this, as you can imagine, in the late fall. I don’t think they’re going to do December hike and if you remove that hike out possibility, then you are flatlined and we’ve really been flatlined since July and then they’re known to hold rates for six to nine months.

So if you do the math, they should start easing probably late Q1 into Q2 and that’s a possibility if the inflation softens up. Now, easing doesn’t mean massive reductions and they’ll probably do a quarter, a few quarters. They’re going to do this slowly. And if we don’t see massive cracks in the ice, stuff’s not going to break very hard. Then you got some kind of what they call soft landing.

For multifamily space, we would like to see long term rates retreat faster. Because a lot of things depend on cap rates. Cap rates are linked to long term treasury, 10 year treasury. So for that to happen, we would like to see, again, what we like or what’s going to [00:30:00] happen, obviously two different things. But the ideal scenario would be 10 year treasury starts softening, it drops below 4%, we go into 3. 5 percent rate, inflation is under control. And then we wind up into some kind of a soft landing with a mild recession and effectively mild inflation as well. Just kind of sail through this without too much blood on the street.

Mike Morawski: Nice. That was well spoken. That’s for sure. And I wish that crystal ball did work. That’s for sure. As we start to wind this down here, what would you tell a new investor coming in the market today?

Mike Zlotnik: So a new investor as who? A new investor who is a passionate investor looking to write a check? A new investor who is thinking, hey, I’m going to get into multifamilies education. I’m going to put my own team together. Describe the avatar. Who is the new investor?

Mike Morawski: Let’s talk about the new investor, the passive investor, who’s thinking about writing a check and maybe just skittish sitting on the sidelines. Really can’t make a decision.

Mike Zlotnik: Yeah. So the new investors, as well as the [00:31:00] veterans are struggling with this. So lesson number one, diversify. Lesson number two, diversify in time. These are real basic concepts, and those who don’t understand it, they will make a mistake when they’ll get too zealous, when the good news is too good, they’ll write too many checks, and they’ll wind up at the wrong time.

So, diversify, the good old dollar cost average, you don’t really do it exactly in real estate, but if you write a 100k check, then write it. If you’re deploying a million dollars, don’t write it in one deal, all at a time, write it gradually over time. If you’re writing 10 million checks, same concept apply.

If you’re writing a 100 million check. Same concept. Gradually over time, don’t try to time the market. Obviously, diversify among many dimensions of diversification. Where you invest location, who do you invest with, what kind of strategy, if it’s multifamily, do some stories, do some industrial, so on and so forth. Diversification helps.

Furthermore, if you are just looking to write your first check, then don’t do single asset syndication. This is the stupidest thing I’ve seen people do. They’ll go do one syndication and that syndication will [00:32:00] go bad. So you’re much better off, of course writing a check into some kind of diversified vehicle, like a fund.

And this is my opinion. It may be different for different strokes for different folks. In addition. You can write a check into a debt syndication, a mezzanine debt, as an example. You don’t take maximum risk yet, because we don’t know whether it’s going to be soft lending, there’s going to be more issues.

We’re very careful with equity checks today, because we just don’t know. If the good money that we’re going to put in today, is it going to be a great opportunity or not, we just don’t know. So equity play if you have super high confidence, you got a phenomenal deal. You just know this is a great deal. Then you can write an equity check and you can feel great about it and if you don’t have that confidence, you may be better off with some kind of lower level of risk type of investment because those investments exist and again, this is me with my biased opinion, because we do equity.

We do mezzanine debt. We do primary debt. Primary debt is absolutely good too. We love primary debt. If you can [00:33:00] get good enough yield, primary debt is competitive. Listen, if you can do primary debt and you can get yourself 12 percent coupon and take on a little risk, and at least it’s a short duration, sit with it. You can live with it. I just like mezzanine debt because if we can get 18 percent yield. And take just a little more risk than we’re taking at 12%. That’s where the attractive part. The equity itself, the crazy part is this. What kind of return target do you need to make an equity to make it comparable to 18 percent in Mazda?

You gotta be in 25, 30 percent target range. Where are you going to find that kind of return on equity today? It’s almost impossible because the debt is so expensive. This is the biggest struggle. We get equity deals today and they’re written for investor target returns. Let’s just call them high tens into low twenties. We can get the same returns in mass debt. That’s the point.

Mike Morawski: Interesting. Listen, I appreciate you being here this morning. You sure have brought my show to another level. That’s for sure. And I always try to bring people on that have a different perspective [00:34:00] and a lot more knowledge of maybe the economy and the markets and just bring that different edge.

I appreciate you. I appreciate your time this morning. How do people connect with you if they want to reach out, talk to you a little bit further, maybe do some investing in your fund?

Mike Zlotnik: Thanks, Mike. I appreciate that. And by the way, I’m not discouraging people from anything, different strokes for different folks.

If you have a local investor who, you know, like in trust and it’s equity check, and it sounds great to you. Hey, if you’re comfortable and you can stomach the risk, you’re good. But what we do a little different. The easiest way to remember and to reach out is I’m Big Mike.

That’s what people call me. I’m six four. I’m a little heavy side. They call me Big Mike, and I’m a fund manager. So bigmikefund.com is fairly easy and if you misspell it and you forget the dear Dan, and just go big mike fund.com. I promise it’s not a kinky site.

Mike Morawski: That’s funny. Hey, Mike, I would never know that you are a little heavy from being on the video, but 6’4 I’m sure that it’s a lot of muscle.

Mike Zlotnik: [00:35:00] Well, I appreciate that. I’m still a big guy. So at this point, I’ve lost a few pounds. So big Mike is trying to get a little bit skinnier. That’s the goal.

Mike Morawski: You said that when we got on, you go out for a walk at the end of the day. How far do you normally walk?

Mike Zlotnik: My routine is typically I try to walk at least an hour if it gets really cold and nasty. The good old rule that I read, I can’t remember the book name, but it said, if you walk fast 30 minutes a day, that’s usually good enough for your health. But jam in an hour, if I can do more, I’ve done an hour and a half unless it’s a hike, but in general, my work is terribly exciting.

I’m in the middle of Brooklyn. It doesn’t get any more exciting. I walk around the blocks and look at the houses, look at the trees. If I can get away, I have about half an hour walk to a park, so I’ll do half an hour walk to a park. Half an hour in the park and half an hour back.

Mike Morawski: There you go. Sounds like an awesome thing to do, but as you said, the weather in New York can get a little bit inclement, so stay warm.

Mike Zlotnik: Thank you. And enjoy Southern California.

Mike Morawski: Yeah, thank you. Hey, [00:36:00] thanks for being here today. And I just want to thank all my listeners for listening in today. I hope today was insightful that you gained some knowledge. Gained some information. Remember, continue to follow us for more updates, more information that’s going to help you. And we’re constantly watching the markets and what’s going on. So if you want to connect with Mike, go to bigmikefund.com and send him an email there. And connect with Mike there. If I can help you with anything, don’t hesitate to reach out and email me at mike@mikemorawski.com. Look forward to seeing you all. Enjoy your holiday season. Look forward to seeing you soon. Thanks Mike.

Kristen: Thank you Mike, and thank you for joining us for another great episode of Insider Secrets. As always, Insider Secrets is brought to you by My Core Intentions. Wherever you hang out on social media, you will find Mike and My Core Intentions. Please like and follow us to get the most up to date real [00:37:00] estate investing trends.

Visit mycoreintentions.com where you can get expert coaching on all things real estate investing and property management. If you’re looking to become an expert, Mike’s coaching will help you scale your real estate investment business. We’re looking forward to having you back again next week for more Insider Secrets.