S4E33 – Michael Salafia – Earn 10% to 20% with Alternative Investments

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Key Timecodes

• (00:57) – Show intro and background history
• (03:37) – Deeper into his background history and business model
• (06:54) – Understanding his investment model and strategies
• (09:21) – A bit about his numbers
• (11:20) – Deeper into his portfolio and tactics
• (12:58) – How he finds deals
• (14:28) – How he minimizes risks
• (17:43) – How many investments does he have today
• (22:14) – His vision and projections about the market
• (23:46) – A key takeaway from the guest
• (26:20) – What is the worst advice he ever received
• (26:54) – What is the best advice he ever received
• (28:33) – Guest contacts

Transcription

[00:00:00.320] – Intro

Hey, this is Sean Tapper, the host of Payback Time, an approachable and transparent podcast on building businesses, increasing wealth, and achieving financial freedom. I’d like to bring on guests to hear authentic stories while giving you actionable takeaways you can use today. Let’s go.

[00:00:17.640] – Sean

My next guest is a private equity investor that has a firm that invests in other companies such as hospitals, car washes, restaurants, and gas stations. And they really make money in a few different ways. One way would be they do fix and flips, which means they’ll buy business, make improvements, and then sell for a profit. And you, as an investor, can make a sizable chunk of change in a short amount of time, such as 90 days. The other way they make money is to buy a business and hold it for the long term and collect the cash flow from the business ongoing. In this episode, they talk about what they look for in businesses, their vetting process, and what returns you can expect per year. Please welcome Michael Salafia. Michael, welcome to the show.

[00:00:59.140] – Michael

Sean, thanks for me on.

[00:01:00.890] – Sean

Thanks for joining me. So why don’t you kick us off and tell us about your background?

[00:01:04.790] – Michael

Yeah, absolutely. So, Sean, I’m the managing partner at Stax Real Estate. We’re a sale leaseback platform for single tenant net lease retail assets. So we’re involved in commercial real estate investment and brokerage and development.

[00:01:19.650] – Sean

Let’s go back in time a little bit. Before you were doing this, what did you do before?

[00:01:25.640] – Michael

I had a whole journey. Let’s hear it. If we go all the way back, let’s take college. I went to Babson College, started studying entrepreneurship. I finished up at Northeastern with a finance degree. And around the time where I was graduating, even though my family is very involved in commercial real estate and has been for Since my great grandfather and fourth generation doing this, it was not a good time to enter into that market, and the tech market was booming. So I went into tech entrepreneurship, venture capital, working with venture capitalists. I did I’m in several tech startups. I actually have a master’s degree in high tech entrepreneurship. That’s my MBA concentration. So, yeah, that’s how I got into building businesses and working for myself. So I’ve been an entrepreneur For the majority of my career, I have had various jobs and roles, and I’ve done a lot of consulting work along the way. But it all started with tech startups in Boston. I ended up moving to New York City. I opened up a digital agency, We were really focused on consulting, and we worked with a lot of great clients. And I started learning a lot about commercial real estate investing from working as a consultant for various companies in the space.

[00:02:44.710] – Michael

And I think from finance companies, investment funds like REITs, Real Estate Investment Trust. I served as a long time at Moody’s Analytics for their commercial real estate analytics platform. So I really learned the business from the top down.

[00:03:02.340] – Sean

That’s awesome. And then when did you found Stax?

[00:03:05.950] – Michael

Coming into Stax, it’s been about almost two years now we got started. Prior to that, I was a broker at Marcus & Millachap. I was focusing on investment sales of net lease and retail assets, and I made a good track record for myself there. So I had so much deal flow and a lot of access to capital. I was able to branch out on my and start doing deals on my own through Stax, which I built into a strong partnership with multiple business units.

[00:03:38.060] – Sean

So let’s dive into that a little further. We do have a lot of listeners that are working a full-time job, and they’re trying to figure out a way to, how do I turn the corner and become a full-time entrepreneur? So let’s dive into that a little bit. You’ve been doing this two years. So how did you first start making money with this company?

[00:03:56.730] – Michael

So it was really challenging. And if you talk to anybody who got started as a commercial real estate agent and then made it to be a broker, we all tend to have the same story. You end up working for at least a year and you’re not making any sales and closing any deals yet. The business is complicated. It takes a long time to learn, and entering into the market is the biggest challenge. How do you just gain a reputation and convince people to let you represent them on the sale of multimillion dollar investment assets? It’s not that simple. It takes some time. So that was really the biggest challenge. And it comes down to the grind and hustle. I spent years working double. So I had a bunch of consulting deals that I was doing. And during the day, nine to five, nine to six, I would still be in the office at Marcus & Millachap, just grinding away, building it up. And eventually, I started making enough money from the real estate business that I could get… I did not have to count on the income from the consulting business And then eventually the real estate business took off so much that the consulting business just took a back seat completely.

[00:05:06.620] – Sean

You could shut that down. How long did you bootstrap?

[00:05:10.560] – Michael

For about a year and a half.

[00:05:12.030] – Sean

Year and a half? Okay. Got you. And to dive into your model a little further. Are you listing and then selling properties? It’s like a windfall revenue event, or are you able to create some passive income with this model as well?

[00:05:27.000] – Michael

Well, we do all of the above. So if you look at the complete picture of how we operate at Stax, again, there’s multiple business units. So I have brokers and agents that work for me just listing properties and selling them the regular way, what you expect in real estate. On the behind all of this is really where the value add and the strategy and the private equity investing comes into play. So we do operate a small private equity fund, and we’ll organize these deals Where we go in, we buy a property, say it’s a fast food restaurant, and maybe it’s a little dated, it’s a Wendy’s, it needs some work. We’ll bring in Burger King, we’ll re-image the property, make it look new and shiny. We’ll install Burger King, they’ll sign a 15-year triple net lease, and now we’ll repackage that and sell it as an investment property.

[00:06:26.770] – Sean

Got you. Now, with this private equity side, are you Are you raising… Other people out there can join you? You could call them limited partners, can invest in an opportunity like that?

[00:06:38.230] – Michael

Yeah, we have various vehicles. So the top one is our fund, where you can come in as a limited partner. And if you’re a credited investor, you could buy into our strategy for that fund and participate in those transactions we’re working with.

[00:06:53.120] – Sean

Got you. Let’s dive into that a little bit because our listeners are looking for other ways to maybe create some diversification. We at Tykr, we’re big on investing in stocks, individual businesses. But real estate is a wide spectrum. As you know, there’s a lot of like, okay, residential, syndicates, commercial, so on, so forth. So You gave us the example there of Burger King. What are their opportunities out there? And then we’ll get into what is the minimum investment size?

[00:07:23.980] – Michael

Right. So what we’re talking about now are alternative credit investments, right? So So at Stax, we have a private equity fund. This is only accessible to accredited investors, and it’s a small fund. So everyone involved has a personal relationship with one of the investment managers. It’s not like open. We’re not going through brokers. You’re not going to get it signed up by your certified financial planner. This is very sophisticated investments. The benefit is that if you’re going into just one deal, now you have to put up, and you’re the investor, you have to put up all of the capital required into that one deal, and all of your eggs are in that basket. The reason investors are coming into our fund structure is because they know our team, they know our reputation. And instead of just putting up all the money into one deal, they can put up as little as $100,000 and participate into a larger sum of deals. Call it like a $100 million worth of deals that we’re rotating in and out of that fund.

[00:08:33.640] – Sean

Can you dive in and give us some examples of what some of those deals are?

[00:08:36.690] – Michael

Yeah. For example, right now we’re acquiring a hospital in Mississippi, and we found a new operator, and we found tech subsidies, and a bunch of other things that make it a very attractive investment. So the rate of return that we’re offering on that is very high. It’s above market because we’re so deeply involved with the business operator and what’s going to go on at that hospital. We’ve been able to engineer an excellent financial plan for them that they’re going to execute over the next three years. In the meantime, that just puts a great deal into our fund, where we’re going to hit over 20 % on our return.

[00:09:21.320] – Sean

I was going to ask you what the returns are. 20 %, that is pretty good. We do talk to a lot of real estate investors, especially at that syndicate size. We We got to aim for that 10 %, maybe 15 %. So 20 %, it’s pretty solid.

[00:09:36.130] – Michael

So it’s 20 % when we exit, right? And in this case, we’ll have a fast exit time frame because We’re redeveloping the property, essentially. On the properties that we’re holding, if we’re holding it long term, typically we’re right around that return, around 10 %, right? That’s a typical hold.

[00:09:58.830] – Sean

So it sounds like you do a little a bit of both. You will hold for the reoccurring returns, but it sounds like you fix and flip, but more on the corporate side. Correct.

[00:10:10.670] – Michael

Or, for example, I’m working on a car wash, And I don’t think that we’re going to want to flip it after we fix it because the amount our gain, our percentage gain is good, but the amount of money we actually gain is not substantial enough for us to even put in the work to sell at number one. Number two, our rate of return is going to be very strong. So we’ll just hold that one.

[00:10:40.530] – Sean

No, that’s a great example. It can be lower maintenance model, but with a lot of reoccurring revenue.

[00:10:47.810] – Michael

Right. Because on that one, the credit that I have from the tenant is not very strong, so it makes it much more difficult to market. But for me, holding it It doesn’t affect us as much the same way, because if that tenant fails, we’ll replace them in 30 days. We have a whole roster of tenants waiting to take that space. So we’re very comfortable holding it there with a tenant that doesn’t have as strong a credit as maybe one with a big corporate guarantee. Sure.

[00:11:20.670] – Sean

Now, just to look at this from the perspective of somebody who wants to invest, let’s say you’re coming forward with $100,000, you mentioned earlier. Do you spread out that $100,000 to different types of businesses within the portfolio to create a little diversification?

[00:11:36.970] – Michael

Yes. And it depends on which fund you’re investing into. So if you’re in our Stax Ventures fund, the entire investment strategy is laid out for you, and it shows the different asset types that we’d be acquiring, what our strategy is for each type of asset, and what our communication plan is going to be for that, for how we’re going to structure it. In other scenarios, we will have deals where we will organize a group of investors who will come in just on one specific property or maybe one specific portfolio of properties. So this would be outside of a fund, but it is a collection of people working together. But those are usually very tight knit relationships to get everybody comfortable there. On the other side, we’ll just package these up and sell them directly. Sell them. Investors who are interested.

[00:12:30.300] – Sean

When you do a fix and flip, what timeline are you looking at? You buy it, you fix it. Are we talking a year or two, maybe a few more years? How long?

[00:12:39.860] – Michael

It depends. It depends on the asset. Some of them you can get done faster than others. We always try to move everything on a six month time frame.

[00:12:49.860] – Sean

Nice. That’s quick.

[00:12:51.090] – Michael

That’s our target goal. Yeah. And that’s why we do not too many at one time and do them all fast and on time.

[00:12:58.840] – Sean

Right. Got it. And then how do you find deals? Do you have people on your team that that’s specifically what they focus on?

[00:13:07.050] – Michael

Yes. Yes, indeed. Yes. And this has taken years and years of business development work. So within the team, you have other folks such as myself, like my partner Ryan Jama. He came over from one of the top teams at all of Marcus & Millachap, which is the… I think they’re the number one grossing brokerage in the United States for commercial real estate. So we’re bringing in these top players that have a deep network of experience, myself included. I have a very deep network of landlords within the product type that I specialize in. So we also have a team of agents, and we have other strategic relationships with REITs and larger funds to access properties at scale. We do a lot in gas station convenience store space, so we have great relationships with fuel suppliers and operators. We have a massive amount of proprietary deal flow. A lot of folks in the marketplace will bring deals to us before they’ll bring them anywhere else because we’re known as someone who you can trust. If you show us a deal, it’s not going to get sent around everywhere. You can bring us stuff, we keep quiet, and you’re only going to hear from us if we’re going to do the deal and bring you money.

[00:14:26.830] – Michael

So we have a good reputation in the market.

[00:14:28.790] – Sean

That leads into my And then the next question here. A lot of my customers are looking to derisk the situation. In other words, remove as much risk as possible. So they would probably ask you questions like, what was your vetting process and selecting this particular business, for example, a car wash or the hospital.

[00:14:49.350] – Michael

And it’s in-depth and thorough, right? And for every single asset type, we have our own proprietary underwriting model that we’re going to deploy. And for our gas station convenience store business, we have an AI component behind the model. We’re doing a lot of data analysis. So we’re really digging into these deals, improving them on a fundamental level. And it doesn’t matter if it’s a gas station an inconvenience store, and we’re counting how many gallons are sold and how many candy bars are sold, or if it’s a medical facility where we’re looking at the makeup of the health care market and seeing, can we actually collect billables? How much of this is Medicare? How much is Medicaid? What’s the mix here that we’re actually going to hit to make sure the income arrives in order for the rent to get paid?

[00:15:40.440] – Sean

No, that’s really good to know there’s some due diligence in place because people, they don’t want to just hear, Hey, I’ve got an opportunity. Invest this much, and you’re off and running. It’s like, Whoa, take a step back. How did you make the decision on this business? Give us the why. So it sounds like you’re looking at the fundamentals. You’re looking at the income statements, balance sheet. Is that correct?

[00:16:02.520] – Michael

Deeply. Yes. Deeply. The financials are what we’ll show to the lenders as their requirement. We’re going much deeper than that. We’re checking point of sales systems on the health care side, I have printouts of their billing systems. We’re diving deep and checking all the numbers. And furthermore, we go into depth on the environmental condition of the property because environmental is a major risk. And it’s a big headache. You don’t want to get stuck with a property that has an environmental issue. That’s a different investment strategy. And we go deep into just standard real estate brokerage work, clearing any title issues and making sure that the survey is up to standards. And at Stax, we’re known for bringing these properties to investment grade standards. That’s why we’re a boutique firm where you’ll get publicly traded real estate investment trusts that want to work with us. And they’ve all seen our files and the way we operate. Our deals go right through the investment committees because we’re on point. We come from that pedigree. Everything that we’ve done and the way we do, what we do is based on publicly traded real estate investment trust. And it’s based on my experience working at Moody’s CRE and based on brokerage principles from Marcus & Millachap.

[00:17:24.560] – Michael

So it’s really all gold standards that we bring here.

[00:17:27.310] – Sean

That’s great. And how big is your team?

[00:17:29.570] – Michael

We We have nine people on the core team. We’re based here in Miami Beach, Florida. A bigger picture organization. We’re probably just under 30 people with all the subcontractors and whatnot.

[00:17:42.240] – Sean

Sure. Got you. And how many What current individual investments do you have today? Are you willing to share?

[00:17:50.070] – Michael

I can give you a general sense of it. We’re shifting properties very frequently. So I think we’re in about, let’s say, under 50 deals right now.

[00:18:00.970] – Sean

Okay, nice.

[00:18:02.540] – Michael

And in 2023, we closed almost 350 deals.

[00:18:09.890] – Sean

Wow. That’s pretty exciting. To be working inside the company analyzing different businesses, that’s going to be a ton of fun.

[00:18:17.980] – Michael

Yeah, you get slam. So for us, it’s all about specialization. So we’re not just going to jump in and do any property. It has to be a property where we really understand the fundamentals behind it. And it doesn’t have to be that complicated. Understanding fundamentals of an office building in most markets is pretty simple. But again, we go deep, especially when it comes to things like gas stations and convenience stores, where you have fuel and underground storage tanks and energy sources. And we do a lot with EV charging and electricity compliance. When I get off this call, I have to look at electrical grading on one of these properties to make sure it can handle the amount of EV chargers we want to put in and that thing. There’s a lot of specialization that comes into play. And that’s my advice for anybody on watching this thinking, how do I invest in commercial real estate? You need to go after something where you really understand it. Invest in what you know. That’s your way to be safe.

[00:19:17.580] – Sean

That’s our philosophy as well, especially investing in stocks, publicly traded companies. I tell people, Try to invest in what you know. In my case, tech, that’s where I spent most of my career when it comes to pharma. I don’t know a lot pharma, so I tend to run the other way.

[00:19:32.490] – Michael

Right, exactly.

[00:19:34.440] – Sean

This is a solid alternative to the stock markets. I like the fact that you have a well-vetted process, due diligence. There’s a lot of different deals in play at the same time, and a combination of deals that are producing passive income and selling. So you’re seeing those returns that range between 10 and 20 %. It’s a nice mix.

[00:19:55.640] – Michael

Right. So on the hospital, for example, we’ll collect passive income while we’re holding that property. But we’re working on the property and we’re going to sell it to a fund that specializes in investing in hospitals. Before we can get it over to that fund, we need to clean it up a little bit.

[00:20:16.110] – Sean

To drill into that a little bit, while you’re working on it, you’re generating passive income. How is that happening?

[00:20:24.120] – Michael

Well, because we’ll buy the property and the new tenant will take over the property. And they’ll start paying us a rent day one. Exactly. But maybe they need… It’s on a deal by deal basis. They might need a smaller rent the first three months while they get up and running. So maybe we’ll give them a discount upfront. Maybe we won’t. Maybe they just pay the full rent on day one because all they have to do is turn on the cash register and the store is up and running. It depends on the condition of the property in the business.

[00:20:56.570] – Sean

Sure. Right on. Okay, here’s a quick commercial break. So if you think investing is too confusing, too time consuming, or too risky, I’m just assured there is a solution. That solution would be Tykr. Tykr is a platform that helps you manage your own investments with confidence. So if you want to know what’s a good stock, what’s a bad stock, when do you buy, when do you sell, and how do you reduce risk, Tykr can help you with all the above. Now, if you want a little extra confidence before you buy or sell a stock, I’m going to show you a new feature we just added called the 4M Confidence Booster. Check this out. All right, so looking at Apple, you can see the 4M is in the center. And this is a tool that walks you through the 4Ms, which are the margin of safety, which is the math part of investing, the meaning, which is the business model and how scalable the revenue streams are. The moat is how the business compares to other companies in the same sector and industry. And the management is a track record of the CEO. Investing is more than just math.

[00:21:50.390] – Sean

You need to look past the math and look at the business. And if you can find a strong stock with a high 4M score, that should give you the confidence to move forward and buy that stock. Now, looking at Apple, you to have an 80 out of 100. If you can get above 80, that’s actually really good. Now, don’t take my word for it. I always say, go to TrustVile and see what our customers have to say, where we have a 4.9 out of 5. And if you’re interested, you can sign up for a Tykr for free. 2022 and ’23, it was really part of ’23, we’re in a recession/bear market. I lean more towards recession because two consecutive down quarters. But now that we’re seeing this slingshot effect going into 2024, give us your projections. How are things going to look in ’24 regarding commercial real estate investing?

[00:22:37.420] – Michael

I think what I’m hoping is that interest rates will come down slightly or at least stop going up. As soon as we have some stability in interest rates, I think that’s going to spur a lot more activity on the buying and selling side. However, I think buyers are still really… It still really hurts with these high interest rates, and it’s been cutting into our margins deeply. And on one side, it forces people to get more creative. On the other side, it just makes a lot of deals impossible to do. So I think we’ll just see a big uptick in activity as a result. But I don’t think prices are going to go up. Usually, when interest rates go down, you see prices go way up. I think prices, in general, went so high that there’s no more room for them to go up. And They’ll start to stabilize. Sure. They’ll start to stabilize. Got you. Now, in terms of valuations, this doesn’t have anything to do with inflation and all of that. Your real estate is still going to appreciate the same way. I’m talking about the business valuation behind the commercial real estate asset.

[00:23:45.770] – Sean

Got you. All right. And then one last question here before we transition to the rapid fire round, what is one key takeaway you can give to our audience? I’m really focusing on the investors. If they want to get into alternative investments, we’re talking about investments outside the stock market, what is one key bit of advice you can give?

[00:24:05.850] – Michael

I would, again, focus on a business that you know and you’re familiar with, and find something where you either have built a personal relationship with the investment management team so you’re comfortable with them, or these deals have to really make sense. There’s a lot of stuff out there, and I by no means want to encourage people to jump into alternative credit investments. I think it’s very challenging to find these. And my advice would be really do your homework and dig deep to make sure that you trust the group you’re working with. But the thing is, when you find these groups that are good and you get in with their funds, now you’re in. And that can be a lifetime of opportunities.

[00:24:55.770] – Sean

Right on. All right. Well, let’s get into the rapid fire round. This is the part of the episode where we get to find out who Michael really is.

[00:25:03.050] – Michael

If you can try to answer- All right, let’s do it. The fun part.

[00:25:07.890] – Sean

Indeed. All right, if you can try to answer each question in about 15 seconds or less. You ready?

[00:25:13.810] – Michael

Ready.

[00:25:14.470] – Sean

All right. So What is your favorite podcast?

[00:25:16.780] – Michael

This one.

[00:25:18.000] – Sean

Aside from Payback Time.

[00:25:19.830] – Michael

The Commercial Real Estate podcast. I think they’re in Canada or something. Okay.

[00:25:26.460] – Sean

All right.

[00:25:27.370] – Michael

It’s a pretty good one.

[00:25:28.590] – Sean

What is a recent book you read and would recommend?

[00:25:31.980] – Michael

I would recommend reading this book called The Art of Negotiation. It was a really fun read.

[00:25:38.550] – Sean

Read it, yeah.

[00:25:39.740] – Michael

Yeah. It’s this FBI hostage negotiator, and he talks about how he went to Harvard Business School and taught them how to be better negotiators. It’s funny. I think I’ve seen the guy on YouTube sharing stories and then promoting the books.

[00:25:56.530] – Sean

I think I know what you’re talking about. That’s awesome. All All right, the movie question. What is your favorite movie?

[00:26:02.490] – Michael

Of all time, Ghostbusters. Seriously? The true tech entrepreneurship story. That these scientists, that they have to save New York City. I just live in New York City. I love it there.

[00:26:13.240] – Sean

Good call. I’ve interviewed a lot of people, and Ghostbusters is the first time it’s been mentioned. That’s awesome. All right, a few more serious questions here. What is the worst advice you ever received?

[00:26:25.770] – Michael

Somebody told me I should just become a school teacher so I I can get a pension when I was really young. And I looked at them and said, No, I don’t think I’m going to do that.

[00:26:37.490] – Sean

No, nothing against teachers, but entrepreneurs. It’s not for me. Yeah, entrepreneurs. It’s like this drive you, the steady, the same old, right? You live for the adventure. You want something new every day. Anyway. All right, flip that equation. What is the best advice you ever received?

[00:26:58.760] – Michael

The best advice I ever received was that I should just go for it. I remember being at ICSC, the International Conference of Shopping centers, and I was speaking to a colleague who’s high up at a very prominent real estate investment trust. And he would go back and forth and was a good mentor for me. And we would work on deals together, and I would always show him the deals I was We’re putting together and how I was structuring them. And he finally said, Michael, you have a whole business. You could just do this as a business and stop working as a broker at Marcus & Millachap. You should really pursue this and do your own thing. So that was the best piece of advice somebody gave to me. That pushed me over the edge.

[00:27:47.730] – Sean

Great advice. That’s awesome. All right, then last question here is a time machine question. If you could go back in time to give your younger self advice, what age would you visit and what would you say?

[00:27:57.800] – Michael

I would visit myself right as I I’ll just graduate in college and tell myself to stop taking myself so seriously. I need to just slow down and focus on fundamentals and let things build over time by really adding value and learning. I always push, push, push to the top of the pile. And I feel like if I moved a little bit slower, I could have had a much more stable journey and progress faster overall.

[00:28:32.030] – Sean

That’s awesome. Love it. All right. And where can the audience reach you?

[00:28:36.100] – Michael

Yeah, absolutely. So again, just type my name into Google, Michael Salafia. You can visit us online at staxre. Com. That’s S-T-A-X-R-E. Com. We’re on Instagram, LinkedIn, Twitter, all the social media’s, X, Y, Z.

[00:28:56.270] – Sean

We’ll get all the links posted down below. But thank Thank you so much for your time. Really enjoy learning about your private equity company. I know you frame it in the way of real estate, but I look at this more as a PE. This is pretty cool fund. Love it.

[00:29:10.860] – Michael

Thanks, Sean. It’s been great talking to you.

[00:29:13.350] – Sean

All right. I’ll talk to you soon. See you.

[00:29:15.700] – Sean

Hey, I’d like to say thank you for checking out this podcast. I know there’s a lot of other podcasts out there you could be listening to, so thanks for spending some time with me. And if you have a moment, please head over to Apple Podcasts and leave a five-star review. The more reviews we get, especially five-star reviews, the higher this podcast will rank in Apple. So thanks for doing that. And remember, this show is for entertainment purposes only. If you heard any stocks mentioned on this podcast, please do not buy or sell those stocks based solely on what you hear. All right, thanks for your time. We’ll see you.