The Coming Multifamily Distress Wave: How Smart Investors Are Preparing

Mark Shuler (00:00)

Well, there is a wave of distress coming, which is gonna present us with a generational opportunity to buy assets at a very deep discount. You know, I’m talking fifty, sixty cents on the dollar. But you have to know how to negotiate those deals and who to talk to, get the right money in place. Be able to find the deals and then find the folks who control the deals because it’s no longer the operator. Those are generally with the lender.

Meghan Escobar (02:05)

Welcome back to another episode of Real Estate Pros Podcast. I’m your host, Meghan Escobar. And one of my favorite parts about being able to host this show is to have the opportunity to sit down with incredible entrepreneurs and operators and learn not just about the business, but what they’ve built, the person who built it, the person behind the business. Because every business has a story. Every operator, entrepreneur has turning points where they shaped their way of thinking, the way that they lead and how they grow. So today we’re going to dive into exactly that. I’m excited to invite and announce and welcome in Mark Shuler with SGRE Investments. Please tell me I said your name correctly. All right. Well, thank you so much for being here, Mark. I’d love for you to start with.

Mark Shuler (02:54)

You’ve got it just perfect.

Meghan Escobar (03:00)

Someone meeting you for the first time. Who are you?

Mark Shuler (03:02)

Well, you know, I’ve been a practicing architect since nineteen eighty-five. I have done hundreds of buildings in that time frame. Lots of residential, a fair amount of commercial. But my focus has always been housing. And so I’ve just been a housing guy for as long as I can remember. I wrote my essay at architecture school back in eighty-two, eighty-three about affordable housing. Just kind of been my thing for as long as I can remember. And turns out I always wanted to be an affordable housing developer. So in addition to practicing architecture, I run a real estate investment company and that’s exactly what we do. You know, we we renovate and lease out workforce housing, primarily in the Houston marketplace. And have you know, about 4,500 units under management now, about six hundred million AUM. It’s a challenging business right now. But you know, I at the end of the day and the beginning of every morning I still get up and I still want to do it. So call me crazy, but that’s what I do.

Meghan Escobar (04:10)

That’s wonderful to be able to, you know, do something that you love to do. Most people don’t, right? They typically do a job or get into some type of career that just creates, you know, income. But one thing that caught my attention about you prior to getting on here live was the way that you have been able to analyze and recognize the industry and where it is today. You know, not an easy not an easy thing to do, especially in the climate that we’re in. So talk to me a little bit about what’s been keeping that machine running.

Mark Shuler (05:34)

Yeah. Without getting into the whole thesis, because I could spend an hour talking about this. You know, it’s not a I don’t think it’s a big secret that interest rates have gone up. And what that has done is challenged the valuations of a lot of assets across the country. And on top of that, we’ve had a high inflationary environment for the last four or five years. Which has squeezed operating margins considerably. We are like any operator out there, very focused on operations, trying to maximize efficiency. And you know, we self-manage our portfolio. We have a large management company we formed, have a lot of people on the payroll, a lot of outside vendors who we know and trust. And so you know, this this industry is not just about trading on momentum, which it was back in the late teens, early twenties. A lot of people were getting into the business just because they thought they can make money and not really have to work that hard. This is a very difficult business. And so we’re very, very fixated on our operations right now, which is historically where the business has always been. It was just that we were in this low interest rate bubble for 15 years and you know, which made the acquisition of assets a lot easier. And if the momentum of that low interest rate environment kept going forward, you can buy, hold, and sell and make a profit. That is no longer the case. You have to actually operate. And too many people got into the business without any understanding of operations. But this business is nothing but operations. So we are very fixated on squeezing every ounce of efficiency we can. We’re constantly negotiating insurance, negotiating taxes. And this year alone, we were able to get a break on our insurance of 30%. That that one break saved us a million dollars a year.

Meghan Escobar (07:43)

That’s incredible.

Mark Shuler (07:44)

Yeah. And we’ve had a similar reduction in our tax rates across all our portfolio in Houston. So so we’ve been in this kind of wave of distress, I’ll call it, for three years, the extend and pretend phase. We’re bumbling along the bottom of the cycle and we’re starting to see, you know, we’re coming out of it. And so you know, we’ll see. There’s gonna be a lot of opportunity buying great buying opportunities in the next couple of years. Mm-hmm. So we’re getting prepared to really get some nice assets at a deep discount.

Meghan Escobar (08:15)

Love that. So every operator that I know has a moment where things became real for them. Maybe a deal went sideways or a time that they had to pivot fast. Do you mind sharing one of those moments for you, Mark?

Mark Shuler (08:28)

I boy, it seems like every day that’s that kind of exercise for me. Yeah, look, you know, in order to be an operator in this business, you just gotta have some meat on your bones. And you know, I had one deal where I had some contractors rip me off, you know, and ended up in a lawsuit that continues to this day. I’ve had three fires take down entire buildings. You know and then I have you know to grind through an insurance claim process. That’s always a year just to negotiate the insurance. Then you have to rebuild. That’s another year. In the meantime, you’ve lost all that income, you’ve displaced tenants. You can have weather-related events that you know, these how do you deal with how do you anticipate that? Right. So you know, and then I just inflation. You know, a lot of my tenants are really stressed financially. And you know, it just makes turnover a real thing. Now I’ve got vacancies I’ve gotta fill.

Meghan Escobar (09:32)

Yeah.

Mark Shuler (09:34)

One of the things I’m seeing in Houston are these brokers. I’m not the only guy to discover AI. There are now these brokers down there that will doctor income and work histories. And I will, you know, and I have tenants applying and you know, for a minute there we didn’t catch it, but now we employ our own sophisticated AI software where we’re scanning all these documents and we can see who’s doctored their work and employment history, income history.

Meghan Escobar (09:46)

Yeah.

Mark Shuler (10:01)

So we’re now rejecting in some of our assets 45% of the applicants. Yeah. But it’s better to catch that up front than getting somebody in there who wants to take advantage of a concession and not pay rent for three months. And it takes me a year, a month and a half, two months to get them out. Now I’ve incurred all that lost income plus a unit turn. Right.

Meghan Escobar (10:08)

Wow.

Mark Shuler (10:29)

So it’s better for me to stare at a vacant unit for three weeks than it is to bring in somebody who’s gonna kinda game me for six months.

Meghan Escobar (11:10)

Right. And that’s the kind of stuff, Mark, that most people, you know, don’t talk about enough. The the struggles behind the the success. And honestly, I I I truly believe it’s what separates folks that are here to dabble. You know, you mentioned something earlier on that this it’s it’s a hard business and you have to understand the operations behind it and not just come into this thinking you could throw some money around and, you know, purchase an investment and it’s gonna run itself. It’s right.

Mark Shuler (11:37)

Syndicate a bunch of money and you know now have to manage both the asset and your investor base.

Meghan Escobar (11:42)

Yeah, exactly. So it’s gonna definitely separate those who are here to dabble a bit and you know, versus the ones who are here to stay in the game long term. And you’ve definitely got the experience in the years to to prove that. So let me ask you, like, what are you most focused on solving or scaling next? Like what’s the next real big goal for Mark Shuler?

Mark Shuler (12:04)

Well, there is a wave of distress coming, which is gonna present us with a generational opportunity to buy assets at a very deep discount. You know, I’m talking fifty, sixty cents on the dollar. But you have to know how to negotiate those deals and who to talk to, get the right money in place. Be able to find the deals and then find the folks who control the deals because it’s no longer the operator. Those are generally with the lender. So you’re having direct lender conversations. So we’re really focused on setting up this machine now where we can acquire, you know, cherry pick, but acquire assets at a deep discount. And I will tell you that basis solves a lot of problems in this business. Getting it at the right basis. If you bought in the last five years, you bought at the wrong basis. And the basis has readjusted. And a lot of folks their assets aren’t worth the what they paid for. So the goal for us is to kind of cherry pick, but you know, and look, there are gonna be some I mean, BlackRock, lot of big institutional capital has a you know assembled a lot of money to pick off the majority of these assets. Our goal is to catch some falling knives and cherry pick amongst those to you know our goal is pretty modest pick up five, six deals here in the next two years and and then exit from as many. We have five or six deals we want to exit from and then pick up five or six new deals at a much lower basis. And they should that should create some real opportunities for our investors. We’re also going to elevate the class of asset that we’re buying. We’re going from the C class to the B class.

Meghan Escobar (14:05)

Okay. Any reason for that switch or

Mark Shuler (14:50)

You know, you’ve really got to have a backbone to want to get into the C class game. It’s a challenging business. It really is. You’re dealing with a a very challenged demographic. And I try to see the best in everybody, but you know, some of those folks, yeah, you know, they’re they’re not the kind of people I want to have dinner with. You know, and so I’m just tired of that. I’m trying I’m tired of the constant churn of that demographic. I need greater stability in my portfolio. And the B class should offer me that. Also, the assets are not as old and tired. The capex involved on it is a lot less.

Meghan Escobar (15:29)

Yeah. Yeah. Incredible. And and great information to share. Thank you so much. You know, I think people who understand what you’re talking about as far as that the no you know the wave of distress that’s coming through. It could if you know what you’re doing in operations and like you said, paying attention and knowing how to negotiate, that’s could either, you know, compound things or create some chaos, depending on you know how it’s played. Now I think a lot of people listening here are, as I mentioned earlier, you know, before we got into the the actual podcast, most of our listeners are early on in their journey where they’re just getting their feet wet in the industry or, you know, they’ve been in for quite a while and they’re just looking for different ways to to level up. And so I think that they would really benefit from hearing this, like when it comes to building the right relationships, Mark, and growing your network. I mean. What’s made the biggest difference for you in that area?

Mark Shuler (16:34)

You know, so I’m I network with a lot of like I do a lot of work on LinkedIn, for instance. Okay. And I meet a lot of serious operators and people like me there. I’m also big proponent of education. And so I’m always a part of a mastermind one way or another. And I’m just in the room with high-level people. I’m participant in one now, it’s a very expensive mastermind, but I’m in a very exclusive room with people who think about the industry and have as much experience as I do. And that is incredibly valuable because we’re just trading lessons, constant lessons, but we’re trading them at our level. So anybody who’s getting in this should, you know, it problem with a lot of people just get in the business is a lot of them start with single families, you know. And so they start flipping single families or trying to build a single family portfolio. And at a certain point, bulb goes off and they recognize that this is not a sustainable business model. So then they want to get into the multifamily game. And which is a different animal. It is more profitable, but requires a much deeper understanding of business and economics. You’ve got to be monitoring monitoring just a lot of forces out in the marketplace because it you are housing is is the most price sensitive thing I can think of. And so you’re always kind of feeling the headwinds out to figure out which way the price is gonna go. So you you know, it it takes, you know, a lot of constant reading and absorbing a bunch of information. Excuse me. Doing that in a room of people who are doing the exact same thing, you can level, you know, you can really gather that information much more quickly and have light bulbs go off much more, you know, often. So I would encourage people if they’re thinking about this, and this is more than a meetup. This is a mastermind. There are plenty of good masterminds out there. Do some work. Kind of research, figure out where you’re at, and join one for a year. And then if you like it, maybe join for another year or look for one that’s a little bit higher level. Just keep pushing yourself higher and higher.

Meghan Escobar (18:59)

Yeah. Keep climbing the ladder. And I appreciate you sharing that. I I don’t think people understand the importance of your network, you know, and creating relationships. That’s something that you can’t fake. And, you know, relationships are really everything in this space. So, you know, depending on where you want to get to in life, you know, getting the knowledge and the experience, talking to the people who’ve been in the game for a while is something that’s going to be able to take you to that next level. So

Mark Shuler (19:27)

Real estate is a team sport. And too many people get into it with a cowboy attitude. And but if you don’t have the experience, you’ll get burned. So just you know be humble. I mean, this is this business can humble you in a New York minute. So but constantly. Learning is sort of a core component of what this business is.

Meghan Escobar (19:52)

Yeah, I agree. And and that’s really an end industry, but specifically here, I mean, you know, there’s always things that are changing and laws and rules and things. So yeah. Yeah. Well, thanks again, Mark. You know, before we wrap up, if someone listening in on this wanted to be able to connect with you and potentially collaborate or just be able to learn more about what it is that you’re doing or well, what you’re referencing when it comes to, you know, this wave of distress coming in. I mean, what would be the best way for someone to reach you? Do you have a phone number or a website?

Mark Shuler (20:27)

Know, you can always hit me up through email. I’m in front of this box all day long. It’s mark@sgreinvestments.com. That’s investments plural dot com. You know, I generally respond within an hour, depending on what I’m doing. So happy to talk, really. I enjoy talking about the business.

Meghan Escobar (20:49)

Perfect. Love that. And for those of you that wanted to catch that again, it’s Mark mark@sgreinvestments.com. So listen, I appreciate your time, your story, and more importantly, your perspective. You know, we need more people in this space who are doing things the right way and providing value. So thanks again for being here. And for those of you that are tuning in, if you did get any value from this, be sure to hit subscribe and we’ve got more conversations coming in with operators like Mark here, who are out here building real business, real time, real relationships. We’ll see you on the next episode.