JF2469: Marrying Money and Opportunities with Mike Zlotnik #SkillSetSunday

Mike Zlotnik was tired of the rat race in IT and followed his love for real estate full time in 2009. Since then, he has worked as a fund manager, providing his passion, financial acumen, and resourcefulness to his business and coaching clients. Mike discusses the results of COVID-19 and opportunities that have risen in real estate investing. He also speaks about the referral chain that is necessary when you are deciding how active or passive you want to be and with whom.

Mike Zlotnik Real Estate Background:

  • CEO of TF Management Group LLC, fund management company
  • Investor since 2000
  • Manages over $34M AUM
  • Based in Brooklyn, NY
  • Say hi to him at: www.BigMikeFund.com

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Mike Zlotnik. Mike is joining us from Brooklyn, New York. Mike, thank you for joining us. How are you today?

Mike Zlotnik: Hi, Ash. Thank you very much for having me. I’m doing great. How are you?

Ash Patel: I’m fantastic. Excited to have you. Today is Sunday, so Best Ever listeners, we are going to do a Skillset Sunday where we talk about a particular skill that our guest has. Mike is the CFO of TF Management Group, which is a fund management group. He has 34 million dollars of assets under management and has had investors since 2000. Mike, before we get into your particular skill set, can you tell us a little bit more about your background and what you’re focused on now?

Mike Zlotnik: Sure. I grew up in the former Soviet Union; from Russia with love, but actually was still Soviet Union. I immigrated to the United States in ’89. I’m a US citizen, US Patriot. I’ve spent almost 15 years in software development. I had a whole career, finishing it as a software executive. I realized my passion has always been real estate. So I turned to real estate fund management full-time in 2009, while I’ve been an investor since 2000. All that, terribly boring stuff. Real estate is actually a lot of fun. That’s why I went full-time in 2009 and never looked back. I live in Brooklyn, New York. I’ve been here for many years. I’m married to my lovely wife over 21 years, four kids and a cat, the fifth child.

Ash Patel: That is a great story. What was it that got you into real estate?

Mike Zlotnik: Yeah, when I bought my first property, our primary residence here in Brooklyn, I was hooked. I thought this was the best thing after the sliced bread. Maybe this is New York City, everything seems to appreciate at 10% a year. You look at this and say, “Wait a minute, cash flow doesn’t matter. Appreciation is the tide that raises all boats.” So after that, I started buying apartments here and I thought it’s a great play. There’s no cash flow, but if you are growth focused, it’s been a good market for many years. Predictability of outcome. I don’t know if it’s not the reason people invest in real estate. Most of the wealth has been built in real estate. Plus, it’s fun. I’m a mathematician by education, and you can actually project and compute everything that’s going to happen. There are risks and uncertainties, but if you do things the way — you could run the good, the bad the ugly scenario mathematically and you get your answer. That’s why I like it.

Ash Patel: Mike, so recently, for the first time ever, New York has had some declining assets. What are your thoughts on that? People moving out of the city, what has that done to supply and demand and prices?

Mike Zlotnik: Yeah, that’s a great point. We are the only place in the United States – maybe there are others, but to me, it feels like the only place, but Manhattan has taken it on the chin. Well, everywhere else, things are going pretty hot, pretty well. It’s a strange phenomenon, because a lot of corporations have had their folks work from home, people are not commuting into the city, the Broadway theaters are closed. I believe it’s a temporary setback. So the demand for Manhattan and kind of the city life has dropped to almost nothing. Now restaurants are coming back and over time it feels it’s going to come back. Yeah, it’s been a negative appreciation in the city for a little bit. I’m in Brooklyn, Brooklyn has been very stable. Manhattan is that odd spot that has taken it on the chin, but it’s coming back.

What has it done? Yeah, it’s just patience. You’ve just got to be patient. It will always come back. We had 9/11, and it came back. At this point, you can’t be too focused on the near term. Just understand that in a year or two, when the Broadway reopens, when people go back to the offices, New York we’ll be back, and so will the values of a lot of real estate. Now this is for residential. Commercial, and office space, it’s another conversation. I think there’s a lot of office space, and over time, maybe too much, so softness in the office market may be multiyear softness.

Ash Patel: Mike, you started out with single family and then some apartment buildings all the way to managing a fund. Can you take me on that ride, from beginning to success?

Mike Zlotnik: Sure. So 2009, I became a fund manager full-time, took a substantial pay cut from my corporate job, don’t want to go back. It was a great career, but I chose to have a lifestyle. It’s all about build your business around your family, rather than… I’m going to crack a joke, I hope listeners understand this. Most of the corporate players, we have this joke, a terrible joke… What are the priorities in life? That’s what we used to say. God is supposed to be number one, then the families, then the work. The joke of hard-working IT guys is we’ll pray to God that the family understands that the work comes first. That was terrible, terrible.

I lived that life for many years, having lots of responsibility and working crazy hours. The reason I like real estate is you’re as active as you want to be and as passive as you want to be. So 2009, I started running the first fund. We financed a lot of quick flips, transactional funding, fix and flip projects, and moved on and on into a number of commercial Investments. The journey just expanded to residential. A lot of people do residential, and we understand the finance of that. Commercial had to evolve. I’ve invested in commercial in the past myself. Then we launched our first commercial fund in 2017, Tempo Opportunity Fund… Without promoting the fund, I apologize, I’m not trying to do that. And we just loved it. From the point of view that fund managers, the most fun job is to be the allocator of capital. Once you have a fund and the flexibility to allocate, you can pick and choose the best opportunities, you can see where the money flows and where the best deals are.

That’s what we’ve been doing for a number of years now, to basically see where things are going. One of the recent trends – I’ll give you an idea. COVID hit, it’s a terrible thing for the world. But what did it do? It dislocated certain sectors of the economy. A number of hotels became dysfunctional; and there are opportunities right away. Buy these dysfunctional hotels and convert to multifamily. That’s an opportunity we saw. As an allocator, as a fund manager, we immediately moved a bunch of capital. These projects make a ton of sense, they’re good projects, and they generate good returns for the fund.

So that’s what I really like as a fund manager. The evolution has been growing and expanding my own horizons into the asset classes and with the right, obviously, sponsors to take advantage of these great opportunities, and then hopefully do good for the world.

Ash Patel: Mike, can you take me on your upswing journey? Because you didn’t become a fund manager overnight. Take me on that journey from your early investments to your rise to where you are now.

Mike Zlotnik: Sure. In 2000, I start buying apartments in Brooklyn. I bought my primary residence, then I bought a number of investment apartments, then I bought some investment houses. The only thing I regret now is selling anything that I sold. It has appreciated so much. The journey as being a passive investor, while having a full-time job, being vice president and director within technology companies in the IT departments… And as I was doing this in parallel, the more I went on, the more I liked real estate, and the more I was getting tired all the IT being the squirrel running the wheel. That’s the journey, it was very progressive. Building a real estate portfolio passively, until there comes a day in the middle of 2009 when I said, “It’s my last IT job, I don’t want to do it anymore.” At that point, I had a portfolio of real estate investments. I loved real estate and it became an opportunity to basically — at that time, if you remember the days of short sale flips, I don’t know if you remember those days… A lot of folks in our network, at least folks I knew, needed the capital to flip. They would get a short sale approval for 300,000, they had a buyer for 350,000; they did the flip, so we did this flip funding called transactional funding. That kind of got us going. And that was a good operating business, until it sort of stopped. From there, a lot of houses had to be fixed and flipped, so we start financing that. I really enjoyed that hard money lending business… And then it continued for a number of years until we started expanding the horizons into a number of self-storage, multifamily, industrials, and other deals.

Break: [00:09:00][00:11:01]

Ash Patel: Short selling flips is basically when you take a property that’s owned by the bank or about to be owned by the bank, and you stop that foreclosure, you buy it on a short sale, and then you flip it. Is that correct?

Mike Zlotnik: That’s right. It was very prevalent during the days of the previous crisis. Remember 2008 to 2009? The financial crisis? A lot of foreclosures and a lot of properties were in technical foreclosure. The whole premise was to approach the homeowner who was underwater and say “We’ll buy the house for this price with the bank’s approval.” And the banks approved and often at a discount to the fair market value to move it out of their portfolio inventory. The flip was to buy it at a discount with short sale approval from the bank, and then flip it immediately to a retail buyer.

Ash Patel: Where did the funding come from for that?

Mike Zlotnik: We funded those deals.

Ash Patel: When you say we..?

Mike Zlotnik: Originally, Tempo Funding LLC was the original funder of these deals.

Ash Patel: Okay. This was a fund that you put together?

Mike Zlotnik: I didn’t found it, just to be clear. A friend founded it, he started it while he was still in IT. He said, “I’m keeping that job. Why don’t you come and run this fund?” I started with — his name is Joe Hoffman, a good friend for many years, and I took over almost right after he started.

Ash Patel: What have you done to grow that fund over the last 12 years?

Mike Zlotnik: For a while, the capital that we needed was very limited. I don’t know if you can imagine transactional funding; you fund the money for three days or two days. We didn’t need to — we had a couple million dollars, which was more than enough to fund these flips. Then over time, as flips became more difficult, back-to-back flips, banks put on the flip restrictions in the short sale approval letters and so on… A lot of folks we worked with essentially asked for 90-day funding, 120 day funding, fix and flip funding. We started providing those funds; essentially, your classic hard money loans. Because there was a time to hold it, so might as well do carpet and paint with minimum, and then sell the house after that.

We did that for a number of years, and then that fix and flip business continued to be very evolving. The big boys entered the market, kind of the genesis of the world. We realized we’re not going to compete with the big boys, so we decided to shift our game. We still do fix and flip funding, except for we don’t compete on price; it became a commodity. So we shifted into the value-add real estate type of deals.

Ash Patel: Where you purchase value add deals yourself?

Mike Zlotnik: Yes or no. Some projects, we were principals; a lot of the projects, we basically went into the game of our relationships working with people who are specialists. So we became passive sort of investors, sometimes LPs and sometimes co-GPs, allocating capital with the best operators. Think of it this way. Instead of me buying a self-storage facility and being a specialist in self-storage, and me buying a multifamily project and being specialist in that, we found these relationships with specialists in self-storage, multifamily, industrial. We have a specialist who buys land and gets the permit for cultivation in Lake County, California. I call him pot — he’s a pot farm dealer, as a way to put it. We invest with the best of breed operators. These guys are specialists, so we provide generally passive capital with the best operators and the best projects. That’s what I do day in and day out. It’s not a capital allocator, not an active operator with a single strategy.

Ash Patel: So you marry people with money, with opportunities?

Mike Zlotnik: Bingo. You couldn’t put it better. You know, it’s funny. People ask me, “What do you do?” I tell them sometimes, “I marry money and opportunity.”

Ash Patel: Perfect. What do you get out of that? What are the percentages? What kind of fees? What kind of structure is that?

Mike Zlotnik: We genuinely run our funds with institutional waterfalls. Because we are not actively involved, so we have to be thin. Because we allocate capital, we need to manage the portfolio, to diversify. We need to do all that work; but we’re not doing heavy lifting. So generally, we charge a 2% management fee and a 20% promote. We pay investors a pref, and then 2% management fee, and then there’s an 80/20 split for class A members. We take 2 and 20 kind of promote on most of the deals. It’s thin, but we’re not doing heavy lifting on projects. When we invest in the projects, we’re looking for institutional level waterfalls. I love mom and pop investors. I mean this with total respect. A lot of folks invest, unfortunately, into mom-and-pop deals, where low pref, low splits, sometimes the upside is capped.

We invest with high-quality sponsors. They’ll have institutional waterfalls. In other words, some of the deals we invest in – depending on the deal… If we invest in debt then we have secured in the first lien position with the right economics there, we’ll ask for an equity kicker. Sometimes we’ll do deals… I’ll give you an example. We have a deal in the portfolio that is almost a thousand-door in Indianapolis, where the pref is 12% and then there’s an 80/20 waterfall above that. So we’re LP, we’re paying 20% promote to the sponsor, but the deal itself has institutional level waterfall.

Ash Patel: Now what is that? You’ve said that a few times, institutional level waterfall. What is that?

Mike Zlotnik: What does that mean? It means that there’s a substantial alignment of interest between investors and the sponsor. When the capital plays a big role in the deal, the capital needs to get a giant share of the upside. Let me compare mom and pop waterfall versus institutional waterfall, just for the sake of comparison.

Ash Patel: Perfect. Break it down for me.

Mike Zlotnik: So value-add multifamily, almost a thousand doors. Again, sponsors get paid less than 1% asset acquisition fee, then investors get a 12% preferred return, and the split above that is 80/20. That is an institutional level waterfall. It’s rare today, it’s very hard to get this type of deal. A lot of deals I see eight, nine, ten, maybe twelve pref, an 80/20 split, and the sponsor doesn’t get a lot of heavy fees up front, they get reasonable asset management fee; that is institutional waterfall. The mom-and-pop waterfall is this example. “Hey, invest with me. I’ll pay you 8% pref and I’ll give you 1/10 profit share. You take all the risk and I capture all the upside.” The key word is institutional level waterfall creates the right risk adjusted return.

All these are fancy terms of hedge fund managers, but the reality is, as an investor, you want to invest in a deal where if the deal makes a homerun, it does great. You as an investor make 80% of that upside, instead of the sponsor capturing the big upside. The mom-and-pop waterfalls is where if the deal goes great, the sponsor makes it like a bandit, and investors make good return. If the deal goes bad, investors take it on the chin and they take a loss. That’s the big difference. Institutional — we just did a deal, a hotel conversion to multifamily. So you understand – the project level IRR was crazy, it was like 90%. Investors may 73% and the sponsor made the rest, the sponsor made a good cut. But investors made a giant portion of that, because the deal was a homerun. It flipped in 21 months with 2.2 times multiple. If you do the math, it works out to be a very strong IRR. That’s the key discussion. Institutional level waterfall ensures investors get the right risk adjusted return. Does that make sense?

Ash Patel: It does. I’ll reiterate that, Mike… So 12% preferred return, and then upon sale or large profits, it’s an 80/20 split.

Mike Zlotnik: 80 to investors and 20 to the sponsor. That is an example of an outstanding institutional level waterfall. A lot of institutional level waterfalls look like eight pref and 70/30. 70 to investors and 30 to the sponsor; that is absolutely normal. I’m not saying it has to be 12 pref and then 80/20 over 12. It can be eight pref and 70/30. Really, it’s a balance. The money is worth more than the sweat labor. The smaller the project, the more sweat labor it is. It just a kind of return on time for the sponsor to make it work.

Break: [00:18:54][00:19:31]

Ash Patel: Mike, somebody that wants to get into what you’re doing, what advice would you give them? How can somebody that’s got a number of years of experience, they’ve built a portfolio, and now they want to marry money with deals, they’ve got great relationships with syndicators, they have a lot of friends that are high net worth individuals – how did they go about becoming a fund?

Mike Zlotnik: Sure. A lot of people have asked me, “Help me set up a fund.” I do a little bit of coaching, bigmikecoaching.com. I couldn’t come up with a more creative name. All my brands are Big Mike. It’s very cheesy. But originally, how I got introduced to Joe was through a mutual friend Cory Boatwright. Cory Boatwright is in the Collective Genius Mastermind. He’s a good friend, and he said everything is Big Mike because I’m a big guy, I’m 6’4” and I’m named Mike. It’s basically making sure you understand you love the stuff. You start with, “If you have a passion for this, you really like it.” Question number two, “Do you have the financial acumen? Do you have the economics and the finance background?” If you have the skills, the talents to do that, I can coach them the rest. The rest is not actually terribly difficult.

The fund management is a beast, but we use a third party administrator. There are service providers, you could outsource a lot of work; you don’t have to do a lot of legwork yourself. So it’s what we do. We outsource everything other than relationships with investors and then the sponsors, and then monitoring and managing the portfolio. The rest can be outsourced.

Ash Patel: How do you vet your sponsors?

Mike Zlotnik: That’s a billion-dollar question. That is a tough one. I start — I literally just look at a deal. I know it’s a Skillset Sunday and we’ve got to talk about skills… Here’s the one of the skills I have. I’m a finance guy, my [unintelligible [00:21:12].15] I’m a mathematician by education. Here’s the call I had before this call; literally, a new relationship. I got an introduction from somebody who I know, and I don’t know the sponsor. So the first thing I try to do is I try to establish referral chain. I need to know who they know who I trust. It’s hard, but I want to establish and know who I could trust as fast as I can. If I can’t establish, I can’t invest. I don’t care how shiny the object is, I don’t care what returns are promised, I need to know who these guys are, and then can I get a strong referral, somehow link the chain with a mutually strong and trusted source. Once they do that, that speaks a lot for the character. Then we take them through a process of verification, backgrounds and some other stuff, make sure nothing funny shows up, that they don’t have a lot of luggage with a bunch of bad stuff. If that’s clean, obviously, we work on the deal itself. Does the deal make sense.

It’s really fascinating talking about skill set. They show me a deal, they building a ground-up project in Florida, I’m not going to say wherel; basically new houses. Their thinking is a build to rent and then sell five years later. I looked at it and I realized, “Wait a minute. Did they turn this into a multifamily and sell it on a cap rate? Because the rent to value ratio is high.” They can get a much better exit price, versus selling it one off as single family, or some of them are two family houses.

That whole process, this is a skill. Sometimes you look at a deal — if you love finance, you can look at a deal and you could say “Wait a minute, this is better to be sold as a package as multifamily instead of a bunch of single families, because the economics work on a cap rate versus a comparable sales approach.”

Ash Patel:  Mike, I like what you said about that referral chain. I think we all subliminally use that when we vet deals, contractors, anything. What if you can’t put the referral chain together, but they’ve got a great track record?

Mike Zlotnik: One of the steps we do, the fund administrator does a background check. We send them over [unintelligible [00:23:07].28] which part of that process is to verify the track record. Once we clear that — it’s a small world. As big as it is, it’s a small world. If they’ve been around, they’ve been doing things, they’re going to get us to somebody who knows them, and we know them. If we get to that, at that point, and the background is good and clean, and the deal looks really solid, we’re going to start working on the documents to make sure if they’re acting badly, we’ll be able to take over. The intention is not to be completely passive. Sometimes we’re passive with very, very competent sponsors, we trust them. But if we don’t know them, when you put together a deal where if they don’t behave, we have ability to take over, a control clause.

Ash Patel: Mike, do you end up dealing with the investors as well, or just the asset allocation?

Mike Zlotnik: Both. [unintelligible [00:23:58].17] we just hired our new head of investor relations. Again, an introduction by a mutual friend, Corey Boatwright. We just hired a great one and she’s awesome. I love talking to both, but the time is finite. So trying to specialize, me staying a little bit more on the deal side, let her lead investor relations. I absolutely love talking to investors and helping folks. Without giving any investment advice, we try to understand, “Are you investing for growth, or are you investing for income? Are you investing for tax efficiency, are you qualified money, or non-qualified?” Our funds, we have a family funds. Different folks, different strokes, different matches. Someone needs tax efficient growth with a lot of depreciation and tax efficiency, and somebody is investing IRA money and they need interest income and they’re happy with that. We try to do the best we can to serve our investors with what they need.

Ash Patel: Mike, I’m going to add that to your list. You’ve got passion, financial acumen, and I’m going to add the willingness and really the passion to deal with investors and interact with investors… Because that’s a big part of it, where you have to truly find out what it is that they need and match them with the right funds and the right resources.

Mike Zlotnik: That’s exactly that. We just have to be very careful. Full disclosure, I’m not a registered investment advisor, I don’t play one on TV. When I talk to investors, I tell them 10 times, “I can’t give you investment advice, consult with your professional.” But that’s why I coach. As a coach, I can coach them. It’s funny, we have some investors who has actually asked for coaching, because they got a ton of money to invest and they don’t know how to pick deals. This is hard stuff; making investment decisions is hard. You can give the money to your financial advisor and they can invest it for you. I have a good friend, he has a term called CEO of your money. If you want to be in control of your money, you’ve got to educate yourself to make these decisions. That process takes time, effort, energy, and obviously costs some money. But it is very important. So you become sort of CEO of your money, you take control it, and you make investment decisions with your eyes wide open.

Ash Patel: Mike, do you coach on teaching people how to become fund managers or teaching them how to manage their investments?

Mike Zlotnik: All of the above. I had people reach out to me who were trying to structure a syndication and they needed some thoughts of how to set up a brand new fund. Or if they have their own portfolio and they just don’t know how to invest. People asked me to look at the deal. So I will look at them as a coach. Under the free speech, first Amendment, I can’t give investment advice again. I hate to say that a few times, but that’s a key message. If I have the time, the time is precious. And I always have to click with a person. If I don’t somehow click with them, I’m not going to take their money. I don’t need the money; it has to be fun for me. If I’m enjoying working with a guy or a girl and it’s a great relationship, it’s fun, it’s a journey. We’re going on a journey together; wherever they’re trying to go, my job as a coach is to help them get there faster and better.

Ash Patel: That is great. Mike, I’ve learned a lot about fund managing and looking for deals. Thanks for the great advice. Thanks for sharing your story. How can our Best Ever listeners reach out to you?

Mike Zlotnik: Sure. Ash, I appreciate, once again, having me on the podcast. It’s very cheesy, but that’s what it is, bigmikefund.com. If you misspell it, and you forget the D at the end… Bigmikefun.com, I promise it’s not a kinky site.

Ash Patel: Fantastic, Mike. Thank you again. Best Ever listeners, thanks for joining us and have a Best Ever day.

Mike Zlotnik: Thank you. You too.

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