Mike Zlotnik- From Soviet Union to American Real Estate Success

Narrator: [00:00:04] Welcome to Compound Ideas, hosted by Ken Majmudar of Ridgewood Investments. This podcast will feature exceptional individuals to uncover deep insights into business, entrepreneurship, personal growth, investing, and multidisciplinary thinking so that you can learn how to improve your finances, find better investments, and pursue authentic lifelong growth, wisdom, and happiness. Learn more and stay up to date at compoundideashow.com.

Ken Majmudar: [00:00:34] My guest today is Mike Zlotnik. I met Mike through the Collective Genius Real Estate Investor Mastermind about 5 or 6 years ago. Mike is affectionately known as big Mike due to his stature. He's currently the founder and runs the Tempo Opportunity Funds, which invest in commercial real estate. Mike has a very interesting background, having grown up in the former Soviet Union and then moved to the United States, spending time in both Rochester and Brooklyn, where he now currently resides. Please enjoy my conversation with Mike Zlotnik.

Ken Majmudar: [00:01:12] Mike, thank you for being on the podcast.

Mike Zlotnik: [00:01:15] Thank you, Ken, for having me on the podcast.

Ken Majmudar: [00:01:17] Let's start from the beginning because in the show we like to cover somebody's life arc. And you have a very interesting one. I know that you were born, I guess, and grew up until probably the age of about 17 or 18, in Moldova, which was part of the former Soviet Union. So can you talk a little bit about what that was like, what the Soviet Union was like, what Moldova is like and what it was like growing up. And a little bit about your family.

Mike Zlotnik: [00:01:42] Sure. So I grew up in capital city of Republic of Moldova, of the former USSR. It was still Soviet Union when I left in 1989. I lived there with my family. I'm not sure what's the best way to describe living in the USSR. It's socialist country, propaganda. The early years were all teaching of the Soviet socialist communist doctrine. I was always a chess wizard and my father was a chess master. And my all my time and energy was focused on science, mathematics and chess. I wasn't really into politics at all. The only thing that really bothered me is the treatment of Jews in the former Soviet Union, from street bullying to career challenges. So again, being a Soviet Jew, growing up as a kid, a few times I was beaten up by bullies on the street. I'm a big guy. I'm 6'4". I'm tall as tall. But when you have a gang of bullies trying to make you feel bad, that was a rough experience. Again, chess math wizard. My father was a chess master too, and unfortunately, he was killed over there. I don't know how else to put it. Passed away in 88. We left in 89. We can't even tell what exactly happened. We just know that he went for a checkup in the hospital, and some experimental drugs were used on him and knocked him off. Completely killed him just within two weeks. Very crazy experience. My mother thinks it's because we are Jewish and sometimes they do it to Jews. You don't know exactly what happens. So my mother thinks they use some experimental drugs. Killed him. I saw him pretty much before he went for a checkup. He was fine. And then they called him on a deathbed. That's my memory of my father. I was 16 at a time.

Ken Majmudar: [00:03:28] I remember you mentioned this previously. So the way that it worked was he was perfectly healthy. He went to the hospital. They didn't allow any family members or anyone to go in. And this was supposed to be a routine checkup.

Mike Zlotnik: [00:03:39] This is the Soviet system. Exactly. They don't let you to go in, the relatives, they call them if it's a problem. But other than that, it's like a checkup.

Ken Majmudar: [00:03:46] What are your thoughts on living under that non-free.

Mike Zlotnik: [00:03:50] It's horrific. Soviet Union? I don't know. We obviously had propaganda on both sides of the aisle, but Soviet propaganda was America was threatening the Soviet Union with nuclear devastation, whatever that meant. And for a while it was the truth during the Cuban Missile Crisis, all that stuff. But it was really the Soviet Union exerting that its way of life power was better and greater than the United States. And they were just trying to project that it's a superior system, but it's a dictatorship. It's a dictatorship with no individual freedom. It's all collective. Collective serves the benefits of the leading elite and leading elites, were the Communist Party elite. That's the basic system. So it was ran like a mafia cartel. The Politburo was the Mafia. That's my observation.

Ken Majmudar: [00:04:36] Did you ever read Animal Farm by George Orwell?

Mike Zlotnik: [00:04:39] Yeah.

Ken Majmudar: [00:04:39] It's an incredible book. Now, when you were there, though, were you aware that the system was this way? Or when you're living there, you're watching everything and you're kind of like, yeah, this sounds reasonable.

Mike Zlotnik: [00:04:49] So being Jewish family, you question a lot of the brainwashing messages that you got through the system. My family, my father didn't believe half the stuff you read in the newspapers, probably 90% or maybe even 100%. So it was a little bit of this undercover listening to the West. Was it either BBC or some Radio Europe, folks tried to get information from the West, knowing that the information from Soviet newspapers and TV was complete and total garbage. So that's as far as you could tell. You really couldn't get all the information because they were blocking sources. And at the time there was no internet. It's just TV and newspapers are the only media available. Again, I'm just going back and we knew that most of the stuff was completely BS and the way, you know is where they were teaching us that the United States was a rotten society with production problems, discrimination, the capitalist society, the capitalists were abusing the working class. And then this beautiful society, the Soviet Union, was so successful. And you go in the stores and the stores are empty, whereas all the products, all the foods, all the shelves are empty. So the so successful society was rotten from within. It had no product, no supply. And then the best product that we got get on the black market, Western radio system or Western Boombox, or you basically see how the Soviet made were terrible products, while the Japanese or the American made were much, much better. That observation gets you the reality that the West is really, the rotten West, the way they were teaching us is really the successful system, and the Soviet Union was the one that was falling apart.

Ken Majmudar: [00:06:29] Is this something that you would have figured out on your own as a 12, 15 year old or something that your dad would have shared with you?

Mike Zlotnik: [00:06:36] I can't tell you what was the experience of another family. I can tell you within the Jewish family, a very chess master intelligence, it becomes obvious. And you talk about this stuff quietly because there's still memory of people disappearing in the middle of the night during the Stalin's days, to the point where in school you hear the stories how people disappeared. Literally, our teacher, one of the teachers, explained this craziness that happened during the Soviet Union days. Again, I don't want to spend too much time on this. But to make a long story short, she said her father disappeared for 15 years for quoting Lenin, who was the founder of the Soviet Union. And it was something like this, that communism is on horizon. They liked phrases like this, whatever that means. Communism on the horizon. It's a wonderful utopia state. But it meant. And at some party meeting, her father said that and somebody said, no, that's Stalin said that, not Lenin, but it's the same phrase, whatever the phrase. And they had little difference in their opinion. Who said that? That's it. And somebody complained about that person, said something bad about Stalin and the person disappeared. This is during Stalin's days. This was that crazy. After Stalin passed away, Khrushchev and then Brezhnev, things were getting lighter. It wasn't as crazy. But still people were fearful of you say something wrong, you even think something wrong. The government is always watching and they're going to come and get you. And a citizen has no say. The government wants to convict somebody or take them away or have them disappear. They can do it any day of the week. Reminds me a little bit about China today. If you go against Communist Party, you can go to the re-education camp and disappear for months. And if you come out and you're not re-educated, you may not come out ever.

Ken Majmudar: [00:08:14] The thing that worries me a little bit is the trend in all these countries. But in America, even where there's a lot more openness to cult of personality and what I consider to be similar propaganda that we saw back then, and I thought we were rid of it, but.

Mike Zlotnik: [00:08:28] I sincerely hope America never has to deal with the type of propaganda and the type of risks that they were in the Soviet Union. With all the problems we have in the United States, we're still much, much, much better than what they experienced in the Soviet Union. So as much as I don't like some of the things that are happening here, I still remind myself this is still America. We still have a constitution. This is still designed to protect the rights of the individual versus a collective system. So I still think America is a great place, and I still believe we can find common ground. We can come back together again. The society can get back to the sort of what I saw when I came to the country with a little bit more compromise and working together for the greater good of the people. I like what JF Kennedy said. It's not what this country can do for you. It's what you can do for your country.

Ken Majmudar: [00:09:14] Absolutely. I completely share that belief. It is a great country and I just want to see it preserve the things that made it great, especially the freedom and the openness to ideas and the idea that different people with different perspectives can come together and solve problems. So you left, obviously, especially after the unfortunate and very tragic death of your father. But before that, you mentioned, because he and you were both really good at chess. Can you just mention about what it takes to be good at chess and what you got out of that experience, as well as mathematics that you apply now in your life?

Mike Zlotnik: [00:09:48] So chess has, one of the best ways to learn is how chess is taught. Today my son goes through, my son studying chess at chess school, and we do this. It's called game analysis. You analyze your own games and you analyze the games of past grandmasters and world champions and other strong players. That process is an incredibly strong tool to learn. One of the ongoing lessons from chess is that you're going to keep making mistakes. This is the phrase from my father after analyzing a game of chess, he said. To we analyze the game, we went over all the moves and all the mistakes that I made. He asked me the question, did you learn from your mistakes? Absolutely dad, I learned all the mistakes. Are you going to make the same mistakes again? I said, no, I won't make the same mistakes again. And he would laugh and say, you would make new mistakes. You'll will find a way because the game is always revolves and something else happens. But it's a continuous learning process at the end of the day, which Chess helps tremendously, it's a continuous learning process. And it's not about winning or losing the game, it's learning the lessons from every experience. That's the beauty about the game, and it obviously teaches a lot of patience, a lot of logic. And this thinking, which is called logical thinking. If I do this and the opponent does that, and if he does that and I respond this way. So you get to think multiple moves ahead and you get to count. And that also is important in business and in everyday of life.

Ken Majmudar: [00:11:08] Or investing in my case.

Mike Zlotnik: [00:11:10] Of course. Yeah, investing. You definitely need to think of this way all the possibilities. This is the best thing about investing. So what's going to happen now we're recording this and we don't know. In my head there are three possible scenarios. There could be stagflation. There could be soft landing and there could be recession. And they're all possible. So lessons learned is if you prepare for every possible outcome, you have a better chance of making the best investment decision.

Ken Majmudar: [00:11:33] One other thing actually, that I really like and I think you enjoy, I don't think I'm as good as you are, not even close. But I do like poker and I think you like poker. Now, my wife at times has said, oh, it's just a degenerate game. And I'm like, no, you don't understand. It's about making decisions with incomplete information. And that's why I like it. You have to constantly be making decisions. What's your experience with poker?

Mike Zlotnik: [00:11:57] I play mixed game poker with some of the best players in the world. When I have a chance to come out to Vegas. So I've evolved from chess to poker to a degree. I do like this element of poker is that it has an element of a chance. Chess has no element of chance. It's a game of pure skill. And if you are a strong grandmaster and you're playing against, let's just call it a master. On average, it's almost impossible for a master to win. Rarely, maybe one out of 50 games a master could win. But in general, if the skill level is sufficiently different, you will have a lot of wins for the Grand Master. Some draws, maybe one occasional loss, but you're talking about it's not going to be the way it is. In poker and poker, the element of chance creates a significantly higher volatility of the outcome. You can have a worse hand winning because of a luck right, but on a long term basis, the law of averages kicks in. Also, in poker, there's another interesting implementation. People use game theory. The crazy part about the game theory, this is the most interesting and fascinating is under the same circumstances, you can make a different decision in a situation. One, two, three, four. You're supposed to raise in poker three times out of four, and one time you're supposed to call. So how do you do this in real time? It's a lot harder, but the point is still the same. It teaches you many similar lessons to chess, but it adds also element of a chance, and it also adds some other, what's the best way? I don't even know how to describe it, but it adds a little more variability to. And that's why I play mixed games poker because we play many games, not one.

Ken Majmudar: [00:13:30] Yeah, Texas Hold'em is the most famous variation now.

Mike Zlotnik: [00:13:33] There's nothing wrong with that game, but maybe my mathematical mind is used to it. And we play mixed games and we'll have 8-10 games in the mix, which makes it a lot more interesting. And one of the reasons for this is it adds a little more variety.

Ken Majmudar: [00:13:47] Is it dealer's choice? And then you go around once.

Mike Zlotnik: [00:13:49] It's like dealer's choice almost. But the way it works is not dealer's choice is you have a game, you play eight hands and you go to the next game. You play eight hands, you go to the next game. And these games are in a stack and it's almost like dealer's choice.

Ken Majmudar: [00:14:02] Okay. So it's not the person's not calling it, it's in a particular sequence.

Mike Zlotnik: [00:14:06] Imagine a stack of cards not playing cards, but just game cards. We're playing No-Limit Hold'em. The next one we're going to play Omaha. Next one we're going to play seven card stud rank.

Ken Majmudar: [00:14:16] The variations. What are your top 3 or 5 in order of the poker variations.

Mike Zlotnik: [00:14:20] So I like Deuce to Seven Triple Draw. I don't know if you know this game. It's a draw game. You get five cards and you have three draws and you're trying to make the worst hand, not the best hand. So the best hand in that game is the worst candidate in regular poker. It's the two, three, four, five, seven, not same suit broken straight. That's called the wheel. That's the best hand. And there's also a similar version of it, the simplified called Deuce to Seven Single Draw, which is like no limit hold'em but it's no limit game. I like that one. I like also Omaha Split Pot- eight or better. That's a pretty good game too.

Ken Majmudar: [00:14:51] Yeah, Omaha is like wild and woolly. I went to one night, I played Omaha High Low with declare. It's basically almost like gambling. It's the variation is so incredible every step because you could even have the hand and then you declare wrong and you lose.

Mike Zlotnik: [00:15:06] I never played with declare, so I don't know the version of declare, but in a traditional Omaha eight or better, you're playing both high low. You have a lot of split pots, so it creates a little bit more of a.

Ken Majmudar: [00:15:15] So declare is that after you get to the end and you have to do the high low, you also have to say with a chip in your hand, whether you're going for the high, the low or both. And so if you don't actually do what you declare, then you still lose.

Mike Zlotnik: [00:15:27] Interesting.

Ken Majmudar: [00:15:28] At that point, it is like a bunch of degenerate gamblers just having fun. I've never done mixed and I don't even know all those games. But I would say that adds another element, which is you have to be extremely flexible in your mind to adjust to all these different rules.

Mike Zlotnik: [00:15:43] You just have to learn games and you have to learn which hands are good in these games. You have to learn strategy. One of these days, maybe come to Vegas, we'll go play some mixed games against some of these top players in the world.

Ken Majmudar: [00:15:53] I'll get pulverized. I can't play on a table with top players, but I can watch you play.

Mike Zlotnik: [00:15:58] Have you seen the movie The Rounders?

Ken Majmudar: [00:16:00] I have, yeah.

Mike Zlotnik: [00:16:01] Johnny Chan right. He's a hero in the movie. I was just playing with Johnny Chan. We were in Vegas when I was a few weeks ago at the Super Bowl. We're playing mixed games and Johnny Chan was there. Some of these names are iconic. They're almost myths. Great friendly game, great crowd.

Ken Majmudar: [00:16:16] Even at a table like that with that many skill players. So you're able to hold your own. So you're at their level.

Mike Zlotnik: [00:16:21] Yeah. I mean, over the years I learned the game and I usually hold pretty well. I'm not sure I'll show up there three times a year and I'll play. I'm there for 3 or 4 days. That's it. But I don't know. I've developed the skill and the knowledge.

Ken Majmudar: [00:16:33] Do you do not do any tournaments?

Mike Zlotnik: [00:16:34] I'll go to World Series of Poker most likely. I go every year.

Ken Majmudar: [00:16:38] Have you gotten deep?

Mike Zlotnik: [00:16:39] Yeah. If you want to come, I have some time planned for June to go for maybe 1 or 2 tournaments. I can't do much longer. I just don't have the time. But I'll go three-four days. I'll play a couple of tournaments in the World Series. It's a lot of fun. I have made money. I think the highest finish I've gotten was 25, but 25 not on the main event we're talking about one of the I have not made the final table. It's very competitive.

Ken Majmudar: [00:17:01] The World Series of Poker got to like 10,000 plus. Now it's, I think probably more like 4 or 5, but it's still a lot of people.

Mike Zlotnik: [00:17:08] Yeah, but I don't play main main event. I don't have patience. The main event is like eight days and I want to be done in three days. Many tournaments run three days and that's as far as I'll take it.

Ken Majmudar: [00:17:18] Generally, there are some very famous hedge fund managers who have gone and played in the poker players, but that may be a story for another day. So you moved from Moldova, the former Soviet Union, you came to New York. I think you moved first. You came to Rochester, is that right?

Mike Zlotnik: [00:17:33] Yes. So just to give you a quick journey on that, we left the USSR and we went to Europe. We stopped in Austria, we left on a bus. We went on a bus on a train, and we wound up in Vienna, Austria. Long story short, we had an opportunity to go to Israel. And again, we're on a path to Israel. But my mother didn't want to go to Israel too hot. She wanted to come to the United States. So we went from Austria to Rome and then applied for political refugee status in Rome and were accepted and admitted to the United States. We entered the United States. We moved straight to Rochester, New York, upstate New York, nice and cold. For those who appreciate cold weather, Rochester gets a lot of snow. Used to get a lot of snow. Gets less now. The weather has been changing. We settled in Rochester, New York, my mother, and rather quickly went to a high school in Rochester and experience in a city school with not necessarily the level of math and science that was used to. But that's how I learned English by rolling up my sleeves and spending time with kids. And it was funny. I was probably the smartest kid in school by far, and I let them copy my homework and math and physics and stuff like this, but I was absolutely nobody. I could barely speak a couple of words. So for me, learning English was the key. So for me it was all about learning English and stayed in Rochester less than half a year, then started undergraduate in Binghamton, New York, Suny Binghamton. And for me it was just deep dive enjoying math, computer science. And after graduating Binghamton, I went back to Rochester for less than a year, and then my childhood friend who immigrated back from Moldova to New York City called me, said, hey, join me, let's reunite.

Mike Zlotnik: [00:19:11] We were friends playing chess for many, many years. I moved to New York City in I'm trying to remember 96, I think it was 95 or 96 and settled in Brooklyn. My friend, sharing an apartment technology career continued in Rochester. I worked for less than a year Eastman-Kodak Xerox. They were the iconic companies then, and when I moved to New York City, financial industry and many years of technology work coming from rank and file all the way to corporate executive and technology career continued all the way through 2009. And on the way I discovered real estate as a passive investor and started investing in New York City, pretty much first buying my own apartment for cash and then buying a bunch of apartments and then some multifamily houses. And that's all New York City. And the lessons learned you could do really well with the appreciation strategy. Appreciation strategy is basically as it gets, just buy these apartments, hold don't need to make any cash flow. But the general rate of appreciation in New York for many years looked to be very, very attractive. And I don't know when the pattern broke, but I did the math at some point. It felt average rate of appreciation in New York was 10%. That's what it felt like for many years. The 2009, when I was done with technology career, I was ready, completely interested, to jump into real estate full time. To me, it was the most logical time and. That's when I switched and that's when I got involved with Tempo Funding.

Ken Majmudar: [00:20:36] So before we get to Tempo Funding, what have you learned about real estate investing? You mentioned that in New York City it was more of an appreciation market. But how do you know if a market is an appreciation market or not? What if you buy things in, say, a place like New York thinking it's an appreciation market, you get no cash flow and then it doesn't appreciate.

Mike Zlotnik: [00:20:55] You don't, other than you could look at historic data. Historic data can tell you what the prices have done over many years, and overall the data supports the appreciation theme. I did the research that it's a 10% appreciation. To me, it felt like great hedge against inflation. When you buy your first apartment, you have to pay rent. So for primary residence it was a pretty basic lessons learned. You can benefit, you get tax benefits, you can write off interest. If you borrowed in a co-op or a condo, you may have some fees you can write off. In any case, the very basic lessons you learn is that investing early and investing over a period of time in a market that has shown historic appreciation works, and then some basic ideas have come from the fact that actually, New York City continued to appreciate at a pretty steady rate. One of the most basic lessons is that if you borrow money on a mortgage, and your rate of appreciation in a given market is higher than the rate of mortgage interest you're paying, you will wind up ahead. It's pretty basic stuff. So in New York, I came to a conclusion that over many years, property is located in a good area. Continue to appreciate it doesn't have to be 10%. It can be eight seven, but the mortgage rates were low and you can benefit from that.

Mike Zlotnik: [00:22:09] Other lessons learned is steady Eddie wins. Steady and persistent. You don't need to hit for the stars. You need to hit home runs. And I can tell you from my technology career being so many years in technology, I was an investor in technology and not just publicly traded securities, but also some private investments through friends. And I can tell you that VC angel investing in technology companies, you write ten checks. If you get one good one, you're lucky. And you that one makes up for the nine losers. But the general theory of investing in technology is you're going to wind up hitting a lot of strikeouts, and you hope for one massive home run. Real estate is very much the reverse. So everything I touched just made money. Maybe not fast, but simple, predictable, steady. And I also bought without leverage for a while. So for a while I didn't care about leverage. It didn't matter whether things go up or down. So there's a lesson learned about leverage. Leverage has worked really well in many situations, but today we are recording this in 24. Early part leverage has hurt real estate. The old lessons of low leverage still hold up.

Ken Majmudar: [00:23:17] Today, even the stuff I think we had talked and you said you brought some co-ops for cash, right? Which you still own a bunch of those and you rent them out. How does the math work today? One of the reasons people use mortgage financing is just how can you have that much cash? I think back then these co-ops were probably a lot less, $50,000 or something. But today, maybe the same things are going for $200,000. That's a lot of cash.

Mike Zlotnik: [00:23:41] These apartments. When I bought the first apartment, long story short, I bought eight as a package in 2003 at 45,000 a piece. Dirt cheap. It was an old guy, 85 year old. He didn't care. They were worth probably then, I don't know, let's call it 70,000-75. Whatever, plus minus, and now $270,000 apartments. Now these are not super big, super fancy apartments.

Ken Majmudar: [00:24:03] How much do they rent for each?

Mike Zlotnik: [00:24:05] Today they rent around 1700 bucks a door. Just maintenance expenses. Because I have no leverage, it's a lot less of a concern. But if I had leverage, if I borrowed, you could borrow up to a certain amount. You probably can borrow in today's rate, maybe 50%, 60%, and you barely break even.

Ken Majmudar: [00:24:23] The rent is 1700. And what's the maintenance in that building per month?

Mike Zlotnik: [00:24:27] Off the top of my head, about 800 bucks.

Ken Majmudar: [00:24:30] So it's like half of the rent is maintenance. And then that doesn't account something internal. You'd have to do some updates, depreciation, some things there too right.

Mike Zlotnik: [00:24:38] Yeah. Once in a while you have to renovate and there's no right or wrong. But my rule of thumb, whatever cash flow you get, you have to set aside half of it to, and this is non-leveraged cash to be able to renovate. Because once in a few years you're going to have to do $20,000 renovation. And it doesn't happen all the time. But if the apartment is run down, then you got to replace a bunch of stuff. You don't need to do 20,000 every time. The apartments, at least they don't have the same problem. They don't have the roof coding, or some other problems can happen with the house. Apartments are a little bit more predictable from that perspective. But think about this even if you have 900 bucks a month cash flow, how much mortgage can you pay in today's interest rates? Not that much. So 50% leverage. You don't even break even 50. It gets tough with the interest rates being where they are. Appreciation actually stalled last couple of years post-Covid. For a while it was hot and then now it's flatlined because of the higher debt service. The prices are not falling, but they're not going up either.

Ken Majmudar: [00:25:32] Yeah, it's interesting and I think as I don't have any investments down there, but even a market Austin, which was super hot, I think I'm hearing now it's cooling off substantially even on like single family residential. I guess it got somewhat overbuilt.

Mike Zlotnik: [00:25:46] Yeah, single family residential around the country. Of course, it's market specific, is not taking it on the chin during the higher and lower interest rates. Commercial is a very different story. Commercial is taken in to the chin as we know.

Ken Majmudar: [00:25:57] For example in Austin I hear now you can get rent concessions and there's good deals and things like that on rentals because there's just oversupply. And historically people forget that many things and real estate for sure are cyclical. And because it's a leveraged asset, when the cycle turns down, there's often pain and restructuring involved.

Mike Zlotnik: [00:26:16] Yeah. In this market, a few things happen. And just I know we're deviating from the main discussion, but the southern markets, let's just call them Sunbelt. They were built heavily. They were doing really well. And a lot of construction started last few years. Now these assets coming to the market in the worst time of the market, they're creating softness. And this is not just true for multifamily. It's actually very true for storage. The other big thing that happened in the last year is insurance is through the roof. So insurance is absolutely insane. What's happening with the insurance? On many commercial asset classes, an interest rate hike was a black swan event. Insurance feels like a black swan event too. Doesn't happen often, but when it happens, these hikes that insurance companies implemented are so large they were not planned for at all.

Ken Majmudar: [00:27:01] So now let's talk about the transition from just having your own real estate portfolio that you bought for cash to Tempo and TF. Talk about that. How did you make that transition and what's your focus now?

Mike Zlotnik: [00:27:15] I'm done with technology, this was May 2009. I was actually very happy I was done. And my good friend, we're still friends today. He was also technology. He's still in technology. He started the original tempofunding.com Joel Hoffman and Joel said, Mike, there's a thing happening right now. This wasn't called Great Financial Crisis. It was called whatever it was called then. But the market's obviously significantly corrected for residential properties. And he was in California and a lot of property values fell. And he had a bunch of friends who started to flip short sales. They would basically lock a property up under contract from a homeowner who was upside down, mortgage balance being much higher than the property value. And an example would be a million and a half dollar property would be selling for 700,000. The mortgage would be $1 million, for sake of simplicity. The banks were foreclosing left and right. There was so much distress. The banks did a drive by BPO of these properties. It was so crazy that the property could be worth $8-$900, and they would accept $700 without really doing the due diligence. So they'd lock it up for 700 and then remarket the property while they were under contract for 800,000- 850. And it would price it for a cash buyer or sometimes even a mortgage buyer.

Mike Zlotnik: [00:28:31] To make long story short, they would get A to B contract, basically purchase contract and the resale contract B2C. They need financing to fund the flip. And Joel originally came up with a idea. The original idea was a mutual friend, Jason Medley. He had a visionary and he was funding these flips. tempo funding was original, was born as a copycat to fund short sale flips. Joel said, hey, Mike, won't you come and run it, I still have a full time gig? Which he continued, so I basically at that point joined as a partner, and we continue to fund short sale flips until banks made it difficult to flip back to back. And in 2011, they started putting on the flip restrictions and you had to hold for 90 days, 120 days. So we start providing 90 day funding, 120 day funding. So basically evolve with times and with the market. And if the deal was bought deep enough and the borrower put some skin in the game, some down payment would give them an equivalent of a hard money loan. And those were the good days we could loan the money, as crazy as it sounds, 18% rate and five points today it's a little bit too tough, but we're coming back to these more expensive money. So we did that for a number of years, and on the way we were building the relationships with folks who were running businesses, and they would see commercial property here, commercial property there, and they need capital, some equity capital for these commercial deals.

Mike Zlotnik: [00:29:48] So 2017, we launched our first commercial fund, Tempo Opportunity Fund. It's still open today. And then we continued to invest, launching a series of additional funds and income fund to grow funds. Now we're launching a mass Tempo Advantage Fund, which is a mass finance focused fund to provide, let's just call it recovery capital for those situations that are overstretched during the last couple of years with higher for longer interest rates. And we we've done a number of one off deals Syndications some of them you obviously know too. So it's been an evolving journey and certainly love what I do. And I feel that we are entering a period of time, and I'm going to save this with the full disclaimer. Of course, I don't know where things are going to go from here, but it feels certain asset classes have done really well. Can they continue to do well? Absolutely they can. And we don't know whether we're going to see any market shifts, some of those strategies. But stock market is doing really well. You're on the stock market. You all know the stock market more than I do.

Mike Zlotnik: [00:30:47] Bitcoin is doing super well, but real estate is depressed, commercial real estate. Following some of the Warren Buffett teachings, contrarian value investing on a relative basis might feel soon enough, real estate might look a lot more attractive than some of these highly appreciated strategies. Again, nothing to say about the real estate can continue to fall and Bitcoin can continue to rise. And so could the stock market, we don't know that. But what's prudent if you've got portfolio heavily successful in one strategy and under weighted and other strategies to diversify. Move some money from bitcoin per se maybe into some real estate. Again, individual choices vary, but it becomes almost a common sense to the point that I reached out to a close friend who I know bought Bitcoin when it was $50 a bitcoin, that cheap, and he's sitting on large amounts of Bitcoin, probably a couple of hundred million. I don't know exactly, but at least because it's up over a thousand fold since the time he bought it. And the crazy part is that I don't know if he's diversifying. Bitcoin is like a cult. So folks who invest Bitcoin, they just believe it's going to $1 million. And the reason I'm saying this is prudent diversification should still apply. But people can do whatever they want.

Ken Majmudar: [00:31:57] No of course of course. Yeah I have a whole other take on it. But that's a conversation for a different day. I just haven't seen the value in real estate yet. It's nothing like 07,08,09. Sure, things are a little stressed and things are down a little. Some of the projects need capital. How much is invested across all the Tempo Funds now?

Mike Zlotnik: [00:32:17] About $150 million.

Ken Majmudar: [00:32:19] And that's some combination of equity and debt.

Mike Zlotnik: [00:32:21] Yeah.

Ken Majmudar: [00:32:22] Tell us about this mezzanine.

Mike Zlotnik: [00:32:23] It's total put to work roughly. That's the best way to put it. Some of it is in debt. Some of it is in equity.

Ken Majmudar: [00:32:29] Do you have dry powder still.

Mike Zlotnik: [00:32:31] Right now it's tight. A lot of capital deployed. And the biggest challenge that has been the last, I just call it 23 and early part of 24 is fresh capital is dried up. So raising capital has been tough.

Ken Majmudar: [00:32:43] And some of the projects probably need capital.

Mike Zlotnik: [00:32:46] Yeah. So that's exactly why we're launching Tempo Advantage Fund. Is that to raise fresh capital, to make it much more attractive for fresh money to come in into these deals? As you said, even if we had the money, we don't have the deals. The deals have been very difficult to find, but we're beginning to see the capital needs for mass financing becoming more and more real. And as a consequence, there are more and more opportunities to deploy the capital on a better position on a capital stack with more fee operators and sponsors, and to get an opportunity to participate in the recovery.

Ken Majmudar: [00:33:16] So how would that work? Let's say if there was a syndication or something, when somebody did and they raised equity, they raised debt, why would there be a shortfall at this point? And then how would your mezzanine or advantage fund be structuring its investment?

Mike Zlotnik: [00:33:31] Very basic story is higher for longer rates. All value add projects borrowed floating rate debt or not all, many borrowed floating rate debt and they borrowed when the rates are very low. Some of them protected themselves with rate cap, some of them didn't. If the rate cap expires, same experience, they are effectively going from mortgage rate that was 4% now to nine and a half, nine and a quarter. Just for sake of simplicity, because you basically all these loans traded SOFR plus a spread. So if you took even 400 basis points spread over SOFR, you'd be at 4.3 at a time when the rate SOFR was 30 basis points. You had what fed has done on top of that. So it's another 525 basis points on top of that. That puts you right in the middle of low to mid 9%. So with these much higher debt service it's a massive pressure. The property by itself, even if the business plan is executed fully stabilized it can break even. So it needs to get to a point where it can refinance with Fannie Mae, Freddie Mac, or some kind of CMBS or agency debt. But many projects are not there yet. They need more liquidity to keep covering the shortfall driven by the interest rates. Next thing that I see, a whole bunch of projects, they didn't expect the inflation costs to go the way they went.

Mike Zlotnik: [00:34:43] So cost of materials and labor wound up being higher than expected. Top of that, you had insurance costs that went through the roof, right? And then ultimately you also have execution. Some people thought property management was such easy business, and it turned out to be way harder than I thought. So execution has been a challenge. So you basically have to pick and choose those people. The problem is not ability to execute, it's the financial stress. And these I call them the worthy operators. Then you got to go look at the project. Is the project a worthy project? Is there enough, let's just call it equity safety margin behind the mass financing? You're injecting mass in between existing equity and primary debt. And that needs to have efficient and comfortable margin of safety. Not every project, some projects you don't have enough as is value, but you will get enough value as you spend the capital on renovations. You get the property to the finish line. So depending on the investment, some projects are worthy, some are not. Some are so upside down they don't make any sense. There's another interesting point I wanted to bring up. Some industry are already going through some fundamental shift- self storage. Some of the recent podcast interviews that I've had is that there is a massive pressures from oversupply.

Mike Zlotnik: [00:35:58] Back to your conversation. Lots of stuff being built and the big REITs are cutting rates heavily. What I learned last couple of days, some REITs like live storage, they're cutting rates or offering incentives to cut the effective rate by 35% to keep the occupancy. It's crazy what's happening. So problems like this pretty significant problems and projects like this, they don't get to the finish line so you can pick them up. The only way they can work is you got to buy them deep enough. Somebody build new self storage facility and they are bleeding cash. They're probably not worth the mess debt. Project like this has to be picked up, probably with a haircut to the bank. Other projects, you could come in with mess and you could still have sufficient equity behind you if the property is already been renovated, stabilized, and it just needs a little bit of time to get to the finish line. So that's where we see opportunity. Mostly what we're doing is not storage but more multifamily. But there will be opportunities in other sectors and the contrarian play works. Really interesting thought process. Last few years multifamily, storage, industrial, have done really well. And those sectors now correcting. Well, sectors that has been neglected and hated for a long time. Open air shopping plazas.

Ken Majmudar: [00:37:10] Office and retail.

Mike Zlotnik: [00:37:11] Offices has been dislocated by Covid. So office is completely different space, so office is massively discounted. But you got to reposition. Retail has been doing incredibly well. They've been able to push their rates up because no product, no supply in the last few years because everyone was afraid of the Amazon effect. Nobody built retail or very limited. Some of these contrarian thinking works. It really works because if you throw the money into a very hot sector, a very hot market, you're facing the problem of exactly that. What's the solution for high prices? High prices? I joined Tempo Funding. My friend Joel Hoffman started original Tempo Funding, and he was a technologist like me, was a friend of many years, and he started it but never wanted to run it. He just literally said, I'll turn it over to you, Mike. Come on in and run it.

Ken Majmudar: [00:37:56] I didn't know that somebody else founded your real estate firm.

Mike Zlotnik: [00:37:59] He started the previous iteration, so he started, he got the tempofunding.com website and he started the original version. He had the idea of funding the short sale flips, if you remember, a great financial crisis. A lot of properties were trading at a massive discount. And literally he had a group of investors in California, he was at the time living in the Bay area, who needed financing to be able to get these houses purchased, short sale and flip them to buyers immediately. And there was a very robust market for short sale flips. And the really interesting part is this. So we met through the Collective Genius. Collective Genius was founded by Jason Medley.

Ken Majmudar: [00:38:36] I thought he founded that in like 2010.

Mike Zlotnik: [00:38:39] Listen to the story. So before that, he had a company called iVisionary. iVisionary was financing short sale flips. They were number one in the country and Tempo Funding was number two in the country. We basically very quickly jumped into financing short sale flips. So for a while that business was very robust and very good. Jason moved to start the Collective Genius in 2010, shortly thereafter, and we continue to fund short sale flips until about 2011, when many banks put anti-flip restrictions. Just to give you an idea, people would get a property under contract for, as an example, 600,000 and the bank loan would be $1 million. These were short sales, the market collapsed and the bank would do a drive by BPO appraisal and appraise the property for 600,000. They would be able to lock it up for 600,000, and then literally market the property for 700,000 or 650 for a quick flip profit, because banks valuations were weak and they were not really paying attention. So the crazy part is a lot of clients, our clients needed to borrow money from us for a day or two and flip the house, and we would charge them one and a half, two points. So the business became a really short term finance of a flip for one and a half, 2%. But the money was turned around in 2 or 3 days. It was a really good business. We could turn the money around a few times a month. There were months we would basically earn 5% on capital, 6% on capital. Now, of course, you don't need a lot of capital for this because the money rotates so fast.

Mike Zlotnik: [00:40:08] And then 2011, the banks start putting on the flip restrictions. 90 days can't flip, 120 days can't flip. Before, you know, we needed to provide capital for much longer periods of time. We needed to underwrite for and have our borrowers put skin in the game and all that stuff. So we very quickly morphed into hard money lending business from what we used to be called flip funding or transactional funding, and then we continue the journey over the years in the hard money space. From 2011 until about 2017, we were doing a lot of hard money deals, and then 2017 we launched our first commercial investment fund, Tempo Opportunity Fund. At that point of time, we had a well established network, a lot of clients who did hard money, but they needed capital for projects that they wanted equity capital. They were basically, getting a lot of loans, gives you exposure to a lot of relationships, which in turn need equity capital. So 2017, we realized there was a lot of opportunity in equity space. And then we went with the first fund and then continued to grow from there launching. We had other funds on the way, launched original tempofunding.com was still around, but we launched DF Management Group, which we use today, in 2014 as a management company. And then we continued to launch other funds, our income fund, two of our growth funds and then a number of syndications over the years. So the journey continued as it made sense through our relationships with investors.

Ken Majmudar: [00:41:38] So what's the model now and how were you guys set up?

Mike Zlotnik: [00:41:41] So the model is evolving rapidly because of what has transpired over the last couple of years. With fed pushing rates up fast and furious, we continue very, very fast growth on the equity side. And some of these deals have challenges in open conversation because if you put dollars in equity, 21-22, so some of those deals, especially if they borrowed the floating rate debt, they need liquidity. They need cash to stay afloat, some of them to survive and then to thrive. So literally right now we are launching our next generation fund called Tempo Advantage Fund that is focused on mass financing. On some of the deals we've already funded with folks that we already know, because these deals need fresh capital. And as fresh capital comes in, we need to put that money in a safer position relative to the previous money. It's not a fun situation to be in, but that's the way for these projects to get to the finish line. So we are in this environment, razor focused on providing mass financing. Just call it 2024 year of hopefully recovery. We're still adjusting, but the capital that's coming in today is at a significantly better position. Our capital stack, very different risk profile versus the capital that came in 21-22. And when we're going to see really deep buys, deep discount and that, there's a lot of discussion today, when are we going to see these deep discount deals? It depends. Some deals may be appearing today. Some may not be visible yet. So we're gearing up for some fresh equity syndications and some fresh equity funds. But we're not seeing that stuff in volume yet. Once it starts showing up, then you go back in the equity, but a very different purchase price. It's a deeper buy. So for the time being, it's mass financing, recovery capital, whatever you want to call it. Until we see you can buy super deep, then you go again back in the equity and you continue the journey of respecting market cycles.

Ken Majmudar: [00:43:32] What happens to, you've already done some of these deals on the equity side or pref, what happens to the previous owners and clients who got into those deals in 21 or 22 or 23 when your new capital comes in?

Mike Zlotnik: [00:43:48] Sure. So a couple of things happening. We're very open, transparent. We're trying to be, as you know, many folks have written checks are not necessarily very professional, sophisticated investors. They are doctors, dentists, lawyers. They're professionals in something else. IT people, but they're not real estate. And you and I discussed this. Most people don't understand what happens when there's leverage. When leverage works both ways it's a terrible situation. When deals do well, leverage magnifies returns. When deals don't do well, leverage can hurt equity investors quite a bit. So we are communicating openly and transparently that some of the checks written last few years, some of them are sitting on thin ice. I don't know how else to put it. Some will be losses, some will recover, some capital, some may still do just fine, but the fresh capital is necessary. We're giving folks opportunity to participate in the mass financing. We actually, in fact, giving them first dibs, first opportunity to be in those deals. But we're not doing capital calls the way other folks are doing capital calls, because participation is capital calls is very low. Industry standard, only about a third people actually raise it. So the way you do it, you raise fresh capital. You give existing investors an opportunity. If they don't take it, new investors can come in. And of course, you continue to provide awareness that some of these deals will be capital losing deals, partial haircuts, maybe complete haircuts. It's not a fun environment to be in, but ignorance doesn't solve the problem.

Mike Zlotnik: [00:45:13] So most of what we do or have done have been in the Midwest, and we feel these deals haven't corrected as badly as some of these Sunbelt projects. But Sunbelts, I've had a lot of discussions that guests on my podcast, these markets are down 20 to 40% on the equity side, and you have a leverage and you borrowed 75% leverage. They're upside down. It's very, very difficult for these projects to recover the money unless the market turns and if the market doesn't turn, they're likely going to be complete losses of capital. Not every project, but many of them are effectively in pretty bad position today because of massive market correction. And I'll just make this comment. It's a shock to many of us because fed traditionally they cut fast but they raised slow. If you go through many market cycles with fed has done they've accustomed the market slow hikes, fast cuts. They did absolutely the reverse this time they hiked fast and they are keeping rates higher for longer. I know they dealt a very difficult hand but they didn't print the money. Politicians did. Fiscal policy is what printed dollars, created inflation and the supply chain broke. They are the solution, and they have one lever to pull. And then they pull the lever as hard as they could pull. And they're now sitting and waiting to see what happens. And it's a slow effect lever.

Ken Majmudar: [00:46:26] How are your doctors and dentists? It's not just you, but I'm just saying in general, I think when they were offered these opportunities, I think in general they had a pretty optimistic approach, and probably the marketing was relatively emphasizing all the great things that could happen and not the surprises. And so how are they emotionally handling this development?

Mike Zlotnik: [00:46:47] Different folks take it differently. Last night I had a great call with the community. Many veterans actually understand. They're not happy. I think the mind understands, the smart ones diversified well and they diversified in time. And those have some exposure, but probably have manageable losses they can live with. And then some folks psychologically are probably not prepared for any losses. I don't know what to tell you. Obviously we operate up and up. Everything is fully disclosed, offering documents, PPM's, the people read it. Did they really pay attention? Did they really think that this could happen? I don't know, and it's difficult. For some people, it's very, very difficult. We are having open conversations, we're explaining. And it's no fun, no question about this, but how come? We're facing the issue of full integrity and full openness, not hiding anything in the closet. These are still difficult conversations, but that's the only way we can operate. I don't have another way. If you are an operator and you have problems and you are telling your investors, first of all, you are not being a good fiduciary, number one. Number two, it's a dishonest behavior. So to me, I would rather be open and honest. It is reputation damage, not fun. But I explain to them, listen, we did everything we could. Maybe we could have stopped investing, sat on our hands in 21 and 22. But the market, how do you know it's the end of a cycle? How do you know? Timing the market is incredibly hard in both stock market and real estate. Directionally, the market has been hot for many years. Is this the end of the market? How do you know? You don't know that.

Mike Zlotnik: [00:48:16] At some point of course you do the analysis, valuation, a number of other things. You're the expert in the stock market, I'm not. And I don't know, we've talked about, this some stocks that look pretty expensively priced, they may continue to do well over the many years. And you don't know that. So again not looking for excuses. Of course the market was feeling like it was approaching peak. It's a long extended bull run. At some point it's supposed to end, but when? And nobody knew and honestly I felt fed was going to hike but slowly and gradually and see what happens like they've always done. But when they hiked the way they did, it destabilized the market so fast we almost didn't have time to adjust. A lot of these deals, whatever, could be sold well in 22. But once we went past 22, things really came to a screeching halt. Valuations haven't yet corrected, but the valuations started to correct. Honestly, I've spoken with a few industry experts. Valuations started to correct Q3, Q4, 23. Why Q3, Q4? Because they're tight to the max. And then they started to keep it there, and it took time for the banks to basically reset the lending standards, tightened all the requirements, and the buyers realized it's very hard to borrow. Cost of money was way, way higher, and when it happened, it basically started to reset the market. The demand for these buyers, demand softened up and then sellers, many of them still don't want to capitulate. So the things that are transacting today are typically, basically sellers have to sell, financial pressure, those who can hold.

Ken Majmudar: [00:49:39] What do you think this says for all those doctors and dentists and stuff, the people that were the source of capital for these kind of deals? Are we going to be able to go back to them? Are they going to come back and continue to do this? Or will they go away from this with an idea that, hey, this is not something I want to do anymore?

Mike Zlotnik: [00:49:54] My sincere hope they will not be discouraged by a few cuts. Some probably will experience cuts very badly. I don't know individual folks' experiences. You are the financial planner for individual portfolios. We don't at all. We raise capital, we deploy in deals with partners. We don't know all the investments. We don't track, we don't lend any advice. We provide no advice at all. So we don't know what they're in. My hope is they're not overexposed. And if somebody is overexposed, of course the experience is going to be very painful. And you and I talked. People need to maintain prudent diversification with publicly traded markets, stocks, bonds, mutual funds, other alternatives, energy, gold. So for those who are actually well diversified, yes, there's going to be some pain, but hopefully nothing too bad.

Ken Majmudar: [00:50:39] But I think there are certain masterminds that were created that will remain unnamed where their general thing was, hey, we're going to help you get out of the market and all these other bad things to go into this thing, because this is where it's all at. Those folks paid a lot of money to do that.

Mike Zlotnik: [00:50:55] There's some truth to this. And by the way, these masterminds continue to provide good education and plenty of doctors and dentists diversified well. And yes, it's pain, but I think they'll be fine. Some people will have a difficult experience and my heart goes to them. I'm so sorry for those situations and for everyone who is going to experience a loss. Nonetheless, this fresh capital coming in. What's really interesting is this. So existing investors versus new investors, new money that's coming in today, fresh members in these mastermind groups of fresh capitalists coming in, they're coming in into recovery. They're going to have drastically better experience versus people who's written checks 21-22. People who have written checks in 21, 22, if they still have sufficient liquidity and they have enough courage to write another check or multiple checks, they may wind up getting some really strong returns on their fresh capital. While some of the past checks may take haircuts, and that's part of the world, that's why in the stock market there's a good old technique called dollar cost average. There's a reason people do that because you just don't know when it's a good time to enter the market. You don't. And if you do, I bow to you if you have that knowledge. Most of us here don't.

Ken Majmudar: [00:52:00] I'm not a market timer. I'm really a long term investor.

Mike Zlotnik: [00:52:03] Exactly. Sometimes you just got to stick with a strategy. Gradually, over time, you go into one market and it works and you go in another market and it doesn't. You continue with your thesis as long as your thesis actually is a good thesis. So you of all people know this.

Ken Majmudar: [00:52:16] Well, thank you.

Mike Zlotnik: [00:52:17] You're welcome.

Ken Majmudar: [00:52:19] For more episodes of Compound Ideas, visit our website at CompoundIdeasShow.com. For more insights like these and to contribute to the conversation, go to my firm website at Ridgewood investments.com and click on the link to insights at the top of the page. Also, please follow me on social media. I'm under Ken Majumder. On LinkedIn @KenMajmudar, Twitter @KMajmudar, Instagram @KenMajmudar, and on YouTube we have a new YouTube channel Investing with Ken Majmudar.

Narrator: [00:53:02] Ken Majumdar is the founder of Ridgewood Investments and several other affiliated companies. All opinions expressed by Ken and podcast guests are solely their own opinions and do not reflect the opinion of Ridgewood Investments or any of its affiliates. This podcast is for informational purposes only and should not be relied upon as basis for investment decisions. Clients of Ridgewood Investments and its affiliates may maintain positions in the securities discussed in this podcast.