Episode Transcript
Introducer [00:00:02]:
Welcome to The Untold Stories of Real Estate Investing, hosted by Wayne Courageous II, a place where active and passive investors come to hear the good, bad, and ugly of real estate investing. Our guests consist of experienced operators and investors who want others to succeed by sharing their stories. If you're looking to syndicate deals or grow your wealth passively in real estate, you've come to the right show. It's now time to sit back, take mental notes, and enjoy our next episode of The Untold Stories of Real Estate Investing.
Wayne Courreges [00:00:39]:
All right. Welcome back to the untold stories of real estate investing. I'm your host. Wayne courageous. Today I'm excited to have Jack Rupee. Jack is an experienced real estate executive. For more than 20 years, he's the founder CEO of JCAM Investments, a company providing access to private advisory services for real estate and alternative investments. Jack focuses on investment and management of different asset classes.
Wayne Courreges [00:01:00]:
Previously a real estate broker, wholesaler, landlord, and Wall Street employee, he transitioned to offering passive investing opportunities to accredited investors. Throughout his career, Jack expanded his connections. Today, his vast network is composed of long term relationships with skilled real estate developers, sponsors, and syndicators. Some appear on this podcast to share the valuable lessons from their own investments. Welcome to our show, Jack.
Jack Krupey [00:01:24]:
Wayne, great to be here. Thanks for having me.
Wayne Courreges [00:01:26]:
Yeah. So we've gotten to know each other through raised masters, which several of our guests, for those that have been listening to our show, it's a great mastermind, and we have great people and great professionals that have been in raise masters. But tell us of your journey. We mentioned Wall Street Wholesaler Broker. Sort of give us your story up to this point. Sure.
Jack Krupey [00:01:50]:
So I graduated in 2001. I had an information technology degree. I thought I was going to be traveling the world as a computer consultant. I was really into the Internet, and just the early stages of the Internet. And 2001 was the.com crash, and there wasn't a lot of jobs. I was fortunate to have one. I didn't turn for a company, but instead of traveling the world, I was setting up small networks for small companies in Rochester, New York. And there wasn't a lot of other opportunities to grow at the time because there was hiring freezes everywhere.
Jack Krupey [00:02:20]:
So I went to Vegas, I think it was like a month after September 11, and the flights were like $50. So I went to Vegas with one of my friends and I saw the glitz and the glamour and the money, and it was just like, wow, what I'm doing with myself right now doesn't seem like it's going to get me to where I thought it would a couple of years ago. So on the flight home, I bought one of those paperback books at Hudson News how to Make Money in Real Estate. No money down. And got back was I read it cover to cover and called my college landlord and he was a real estate broker and he'd owned a bunch of houses. And a month later I had a house, no money down. And then two months later I had another one and really kind of lived that infomercial dream started. Got my license, was sending postcards out, all the traditional stuff, but I realized it was really difficult to scale and built up a portfolio of almost 50 units and we were managing other people's units.
Jack Krupey [00:03:12]:
The property management is a very thankless business. And after the credit crisis of 2008, everything just kind of froze. And this was Rochester. This wasn't Phoenix or Vegas or it wasn't really a boom bus market, but I'd always wanted to kind of do something bigger. So I moved to New York City and there were hedge funds that needed real estate people. People had bought foreclosures short sales and done all that because they were buying thousands of loans and they were Wall Street people. They didn't know what to do with them. So learn the banking side of the business and the bleeding edge of the financial cris.
Jack Krupey [00:03:46]:
I literally worked on Wall Street. I lived on Wall Street also. And my commute to the office was further vertically than it was horizontally.
Wayne Courreges [00:03:54]:
I'm sure that wasn't cheap.
Jack Krupey [00:03:56]:
Yeah, though eight was probably the cheapest time ever to live down there. So learned the business there and then went on my own and ended up partnering with a small family office. Bought a few million dollars worth of loans and we were buying and selling non performing and performing loans just on our own, running a small fund. And then took a meeting with a group of guys that hit me up on LinkedIn and I thought it was maybe a couple guys from Long Island that wanted to buy five loans. It turned out it was a bunch of ex Bear Stearns guys that were restarting a fund after Bear Stearns collapse. And we ended up, over the course of five years, bought $3 billion of loans with them.
Wayne Courreges [00:04:39]:
Wow.
Jack Krupey [00:04:39]:
So it was an incredible ride. I kind of backed into relatively high level Wall Street. We were buying directly from Fannie Mae. We had banking relationship with Goldman Sachs and Numora. We did securitizations. I met one of the characters from The Big Short who had launched his own bond fund and was actually buying the bonds of the mortgages. We securitized. So it was a crazy ride, but I ended up I was miserable.
Jack Krupey [00:05:06]:
I was making more money than I ever had in my life. But it turned into that Wall Street grind. And I got into real estate when I was 21. I got in because I wanted passive income. I wanted that lifestyle and that flexibility. And I sort of got onto this different path. And on top of that, I was in New York City paying 50% tax rate and it was all active income at that point. So eventually I left the firm and I really dove into taxes.
Jack Krupey [00:05:36]:
I really dove into just tax efficiency. So I ended up leaving the firm as an employee, but I still owned a piece of it. I moved to Puerto Rico and I'd been investing in syndications passively and I just realized the tax benefits of it. And once I'd moved and eventually got bought out, I had a pile of my own money that I was investing into syndications anyway. And I really kind of formed this business around my personal investing activities.
Wayne Courreges [00:06:01]:
Nice. So a lot to unpack there. But I really want to talk about these non performing loans and that experience that you had back in eight nine into how it translates today. We are seeing a little bit more distressed properties. There's a lot more news that people are reading, especially passive investors that may put people more on the sidelines than they had been previously. What's your take of what's going on going on now compared to back eight nine time?
Jack Krupey [00:06:31]:
Sure, there's two parts of it. There's the residential side and the commercial side. I'm going to start with the residential side and that does somewhat impact the multifamily side as well. So residential is a completely different ballgame than it was in 2008. Before 2008, there was a lot of residential loans that were in these option Arms that were at a 6% teaser rate. But then we're going to go up to eight or nine. The fact is now 30% to 40% of the US. Doesn't have a mortgage and the other 20 to 30% to 40% are locked below 4%.
Jack Krupey [00:07:04]:
So roughly 70% of the population, give or take, has either no mortgage or less than 4%. And so there is a chronic housing shortage. Add to that interest rates are high, construction costs are high because of inflation. And in many markets, just housing starts are down. And you read something about certain markets where maybe there's still some supply coming, but that's usually at the higher end of the market. If you're building, you're usually building kind of a class A nicer building and then eventually the ones that were built in like 2005 sort of trickle down and become Class B's. But there is a shortage and there's still a shortage of that kind of workforce class B housing. So it's really hard to buy a single family house right now.
Jack Krupey [00:07:45]:
And a lot of people are just trapped. They have equity trapped. It doesn't make sense for them to sell and they're just not going to sell unless there's a major life event. So I think for that reason, a lot of residential I think is going to be stable. There were certain markets that maybe needed a few percent dip because of just going crazy in 2021, but residential should remain stable. With that said, there's always a certain amount of distress. There's always certain life events that happen. And if there's a major recession, there could be some people that are in trouble.
Jack Krupey [00:08:16]:
But the other thing that's happened in residential that really wasn't there in 2000 and 910 is the banks are really incentivized to modify. There's programs in place and there's liquidity. If you have a loan that reperforms, you could sell it back to the bank six or twelve months later. So there's a real incentive to modify loans and make them reperform both from the government regulation angle and also just the economy of just making it profitable. We actually made more money when we modified loans and resold them in most cases than if we had to take them back.
Wayne Courreges [00:08:47]:
You're seeing that on the residential side, like single family?
Jack Krupey [00:08:49]:
Yeah, on the residential side. So if you would buy a portfolio of non performing and then you would do a modification and get the loan performing, you could essentially flip the loan. If they paid for six to twelve months, you could sell the loan back to a bank or insurance company. So there was major financial incentives and that industry wasn't really as 2008 and nine, there hadn't really been a mortgage foreclosure crisis. There was a little bit in savings and loan, but that was on the commercial side. So pivoting to commercial. I did mention that in some cases at least multifamily, it's going to prop up the single family lack of inventory in some ways props up multifamily because of the values. But multifamily has the problem with bridge loans.
Jack Krupey [00:09:31]:
Now there's a lot of noise on that, but you also have to remember that there's still a ton of long term fixed rate debt. There were still a lot of family offices, a lot of private equity that just would do 5710 year debt. So the percentage of bridge loan debt while it's making all the noise right now is not necessarily a contagion to the market. But with that said, I'm in a few deals, we're in a lot of fixed rate, but we're in some deals with adjustable rate. And the pain is real. On those loans, rates went from practically zero to five and a half percent. And when you add the spread on that, it brought the real interest rate. In some cases.
Jack Krupey [00:10:08]:
If there was no cap to eight, eight and a half percent, most people bought three year or two year interest rate caps. So we're getting to that point where the two year caps are expiring en masse. Those that had three years are going to happen sometime in next year and it's causing real pain. I'm hearing of capital calls and we've had one or two small ones and that's going to be a challenge. And it's also affecting cap rates. Not as much as the interest rates have moved, however, but the cap rates have expanded and they needed to. If your cost of debt is six, you can't have a 4% cap rate. So that affects the values and really it puts the operators in a bind because now is maybe not the opportune time to refinance and or to refinance into long term debt.
Jack Krupey [00:10:56]:
You may not have the proper debt service coverage ratio. So a lot of people, what they have to do is just raise more money, prepay a lot of interest to just extend these deals another year or two and continue with their business plan. So it's certainly a challenge. We've seen a few high profile foreclosures in Was. There was more going on. There was the one high profile Houston deal where there was more nefarious actions. It was more to it. But what we're seeing is the good operators and we're in a number of deals with groups that have 50 plus buildings they own.
Jack Krupey [00:11:32]:
The good operators have some leverage with the banks. There's an old saying if you owe the bank a million dollars, you're screwed. If you owe the bank a billion dollars, they're screwed. And what gives me a lot of optimism is we are seeing that at least with our large operators, the banks are playing ball. They're giving a discount on the interest rate and adding a little bit of the spread onto the back of the loan and allowing them to continue. Because rather than foreclose on 50 properties, if you will, which that could cause more of a contagion, I think the banks have come to the conclusion that a really strong operator that's operating the building well has just really caught up because of the capital markets, is better to continue than the bank trying to take it over and do it themselves.
Wayne Courreges [00:12:22]:
Yeah, the bank doesn't want to be the landlord. But we mentioned bridge loan. For the listeners that may not know what the bridge loan is, it is a variable rate loan that bridges from the time you purchase the property till you can refinance into more long term fixed rate debt. And so ideally, a bridge loan would be an opportunity to if you buy an asset that isn't performing to its highest ability. So you're buying maybe a deep value add type property and you're going in, you're renovating, you're changing management, you're doing the right things to get it back to stabilized occupancy good revenue. What was happening during those value add period bridge loans is you then refinance it into more stable fannie Freddie type loans. The issue that was happening, two issues is because it's a variable rate and rates were so low, not all operators got a rate cap. So now they're hurting quite a bit because their rate cap is there was no rate cap or their rate cap to Jack's point was expiring.
Wayne Courreges [00:13:36]:
The other thing, and we've talked about this a little on our show previously, was that bridge debt was heavily used during times when assets were priced extremely high. There was a lot of competition, so people were buying overpriced assets that didn't have a whole lot of value add with bridge debt and those operators are really struggling. I just want to explain what bridge debt is and sort of what we're seeing now. Now, we talked about this before the show, Jack. This is the time for me. I'm bullish. And man, Houston had that foreclosure and it's getting such bad rep. But Houston is booming and it is a great city.
Wayne Courreges [00:14:17]:
And when oil prices are going up, houston does it even better, right? It's a lot of Texas tea, baby. There's a lot more going on in Houston, just oil, by the way. But I will say I'm bullish on buying. We've got a contract in Houston that we're closing in a couple of weeks. I love Houston, I love multifamily. I love what's going on. For me, this is the time to buy. We're getting fixed rate debt off seller financing.
Wayne Courreges [00:14:45]:
We're able to buy assets 33% less than what is on the appraisal district. So talk to us about that, Jack. What are you seeing in today's market? Are you as bullish as me on real estate in this market, or are you more standoffish?
Jack Krupey [00:15:01]:
Yeah, right now I'm absolutely bullish. And then you need to be aggressive when other people have challenges. A couple of quick things. So Houston, there's an economist, I fell in, Peter Zehan, he's got a great five minute YouTube video about why he likes Houston, why he's so bullish. It's the oil, it's also the petrochemicals and the plastics and all the byproducts one of the largest hospital systems in the country. It's an all around great market that I'm very bullish on as far as deal flow, dollar cost averaging is one of the most powerful things of investment. So especially for both the active investors looking for really great opportunities, but also the passive investors that maybe they went into one or two deals in 2021 and now they're concerned or they're worried about maybe not getting the distributions. They thought if a deal works now, you need to continue dollar cost averaging in, because the deals we're buying now are in some cases at a 20% discount or more to where they would have traded at their peak in 2021.
Jack Krupey [00:16:03]:
And so if a deal cash flows today with interest rates in the sixes or sevens, if the rates drop at all, there's significant upside. A one point rate drop could be a 20% increase in value if the cap rates drop somewhere similar. So it's really important to dollar cost average in and then the new deals will cash flow day one. And overall, if you're consistently building that pyramid and investing into whether it's multifamily, self storage, just all of the syndicated alternatives, if you're consistently investing over a three to five year period, you're going to be building tax deferred income because you're generally showing a loss because of the depreciation. And then when you do take your capital gain or any recapture five years later, if you reinvest in something else, you could offset some of that. So this is the time to continue building that long term wealth and that long term portfolio outside of the stock market, because the stock market had a ten year period in the where it didn't do anything, and that was the last higher interest rate period. So there's no guarantee that you get that 10% a year in your Vanguard funds. And if you take the time to research and get more involved in this side of the market, I think it's a very powerful tool for retirement.
Wayne Courreges [00:17:25]:
I agree, Jack. And one of my biggest regrets now, I had just gotten out of the Marine Corps in 2007, started in commercial real estate with CBRE there in Washington DC. But I didn't have any money. I was Alexandria, Virginia, living in my one bedroom, and it was expensive. But those people that took advantage of that time, who were set up for that time and bought assets when everybody else was running. So I have that mentality. I'm not super. Knowledge comes with age, and I've seen several cycles of ups and downs and recessions and definitely being in these different markets, but I just remember, oh, eight.
Wayne Courreges [00:18:06]:
I wish I had been more prepared, but it just is what it is in today's market. I'm much better prepared now. Real estate is a risk. There is no crystal ball what's going on, but so is stocks. And for me, I try to stay diversified, but I also put a heavy percentage of our net worth into real estate. Just the fact of social media the way it is today, like one tweet one thing going on outside of the country or in the country can really hurt stocks performance. Whereas real estate, it's a physical, tangible asset that is serving a need that, oh, by the way, you have to pay your rent if you're going to want to have that basic need of just I think overall around I just am more bullish. And I'm grateful, Jack, that people are not as bullish because it's better time for us as sponsors and operators to find good deals.
Wayne Courreges [00:19:03]:
So when I go to these conferences and people are like, they're not buying, I'm like, great, I don't have to compete with you like I did a year or two ago, which was crazy, it was a bubble feeling. People were putting in a million dollars more than what we were offering. And I'm like, how do you make those numbers work? Hopefully they're doing okay still right now, but the numbers didn't work a year or two ago. Anything more you want to mention on that before we shift gears a little bit?
Jack Krupey [00:19:32]:
Yeah, there's two different types I mentioned earlier, like the larger operators that have more wherewithal, and that's something I'm seeing right now as well. There's the people that clubbed up together, all went to a course together, raised a bunch of money. Those are the ones that I think got into a little bit more trouble. They don't necessarily have the balance sheet to make a capital call because it's like 20 different people with 100K each. Whereas we had operators that have written seven figure checks themselves to keep deals moving. When their lender was not releasing the construction draws, they were writing a check themselves to get the project done so that it wasn't stalled while waiting on the bank. So there's a lot the good operators, the ones that have the capital that are actually executing right now, are the ones we want to be invested with. And the deals that are distressed are for a couple different reasons.
Jack Krupey [00:20:23]:
We were recently involved in a transaction where it was actually Blackstone selling. They had to sell because it was part of their private fund and there were redemption requests. It was an open ended fund, so people are requesting their money back and it forced Blackstone to sell a good asset that they were not through with their plan yet. So it's still a bit of a value add. And they sold it for 8 million less than they paid for it in 2021 because they had to because of their fund. Docs there's another deal which is closer to that example. I mentioned that we were fortunate to generally stay away from where it was just a syndication group of a bunch of people who went to one of the seminars and it was an asset in Dallas. Their interest rate capped, expired, and they cannot afford to cover the debt service now.
Jack Krupey [00:21:10]:
So their choices were basically they had to sell because they couldn't raise enough new money to handle the interest rate payments for another few years. So similarly, we're buying at about 8 million lower than what they paid for it in 2021.
Wayne Courreges [00:21:23]:
Wow.
Jack Krupey [00:21:24]:
So they're not going to lose everything, but investors will lose principal on that deal, and their loss is our gain. And with that said, if you have the staying power and you could last another few years, that same asset may have still made a profit if the investors had the wherewithal to just weather the storm and continue to renovate units, raise rents, grow the net operating income, because that's still the most powerful thing. And the number one metric I look at is, does the value add plan make sense? Will they renovate a unit and raise rents from 1000 to 1300 or 1000 to 1500? Because raising the rent by $400 a month is almost $5,000 a year. A $5,000 increase in net operating income can raise the value of the building by $100,000. To me, that's still the most powerful metric. And if interest rates move up or down another half a point a point, if we're in a recession or not, if that rent number is moving to that level, that's the one thing we can control. And that's what I really focus on. And that's what I preach to almost everyone I talk to is that if you hit that metric, it doesn't really matter what happens in the economy.
Jack Krupey [00:22:43]:
If you're hitting that metric, you should be okay.
Wayne Courreges [00:22:45]:
Hey, listeners. It's Wayne courageous. I just want to pause real quick to say thank you for listening to our show. I hope that you're getting a lot of value out of it. If I could ask you to go ahead and, like, subscribe and share this podcast, that would mean a lot. It will get a lot of other investors like yourself learning about the process and the steps to successfully invest in real estate, either as a passive or an active investor. I also want to do a quick introduction of CREI Partners. I'm the managing principal for CREI Partners and we started it back in 2019 with one goal to grow your wealth passively in real estate.
Wayne Courreges [00:23:18]:
We do so by buying assets in multifamily build to rent communities and RV boat storage facilities. And we do so in areas that have strong market fundamentals and also have strong partnerships with other real estate investors, such as ourselves. We personally discovered that passively investing in real estate was a really great blend for people that are busy like yourself, and that you can invest passively in real estate and still reap the rewards of the returns, the tax benefits, et cetera. If you're interested in learning more about passively investing, check out our website. We do a lot of content through our Passive Investor Coaching Program, through our podcast, our blogs, and just other information that we do on a daily basis. Check out Creipartners.com. Again, Creipartners.com. If you're interested in building the relationship and joining our Investor Club, there's a link there to join.
Wayne Courreges [00:24:08]:
We'll set up a call and continue building the relationship with you. We're super excited to have that opportunity and I wanted us to get back to the show and hopefully again, you're enjoying the conversation and look forward to connecting soon. Thank you. Well, and I think I always like to look at lessons learned and I never kick people when they're down, because at the end of the day, part of this is timing of market, right? It's risk, and there's good operators that are suffering right now too. Anyway, I try personally not to, like I said, kick anybody down, but I try to learn as much as I can to make better decisions, not only as an investor for myself, but as an investor who's or fiduciary to my investors. So a couple of things I've picked up recently. One, I am grateful we bought a property last year, Jack, that did have a bridge debt, and the bridge debt was based on value add, but it was a three year bridge with two one year extensions and had a rate cap for three years. So part of that is I'm sleeping at night knowing that we've got time, but we also have two one year extensions, right? That's one, but two, and I posted on social media about this about a week ago, is that we're still seeing ten to 15% rent increases.
Wayne Courreges [00:25:29]:
And the story behind that though, is like we bought a property and we have a couple of other properties like this as well, where we bought way below well, we bought where the rents were so below market that the 10% isn't 10% above market, it's just getting closer to what market is. And so that's the story behind the bridge. And what you're talking about with value add is when you buy a stabilized asset and consider it a value add, it's harder because you're already leading the market in a more stabilized market priced asset. Right. So from a passive investor side, it's important to ask those questions about look at the comps, like where are rents today at what property you're going to invest in, where are the comps around? Because you can still see that 10%. That's where you're getting that $300 plus rent on renovated and it's doable in today's market because it's still within market comps. I know there's a lot of words. Absolutely.
Wayne Courreges [00:26:32]:
It's not like $400 more than what the market is because in today's environment that's hard because everybody's competing for Occupancy.
Jack Krupey [00:26:40]:
Yeah, you're 100% right. We're absolutely on the same page there. I will just add I've had some articles sent to me and we're in a deal in Phoenix. As an example. We're in deals in Dallas where it's like top ten markets where rents are declining and Phoenix will be listed up there, but it's actually the average or it includes the class A, where class A went from 2000 to 1800, but 1000 to one $200, rents are still going up 5%. So you really need to do a deep dive. The statistics can really be molded to kind of whatever the clickbait is on the article, but it really is market dependent and asset class. And whether it's class B or C, look, it doesn't mean that there's not certain markets where you're dropping rent $20 because the Occupancy across the street dropped and then they're dropping.
Jack Krupey [00:27:31]:
So it's not completely immune. But your main point is when you're buying something where rents are below market and that still happens across the board, there's still a lot of mom and pop owned. There's buildings that had seven years ago got seven year debt, and during this whole upcycle in 2021 where everyone else is buying to renovate, some of those buildings just didn't have the budget. If you were in a syndication seven years ago and it was just a simple steady buy and hold and collect your coupons every month, you're not going to necessarily raise money to do a capital call to renovate units to try to get into the game when that wasn't the business plan for the building at the time. So there's still opportunities that people just missed the boat and that whole run up. In rents in 2020 to 2022. There are deals that families have owned since the they just haven't bothered. They just paint and carpet and don't really push rents because they owned the building since the 80s.
Jack Krupey [00:28:29]:
It's either free and clear, or they bought it for nothing back then. So those opportunities still exist, and that's real Estate 101 at that point is just finding way to unlock value.
Wayne Courreges [00:28:41]:
Agreed. No matter where. I don't time markets. You just buy based on what knowledge is given at hand, where interest rates are today, where the insurance is today, where are taxes? What are those projections? Conservatives. So the numbers work, and this is a point you made earlier. If the numbers work today, imagine when rates and things go down in the future, which they will. I mean, there's cycles. History shows that there are cycles.
Wayne Courreges [00:29:07]:
Who knows how far it'll go down? I don't think it's going to go back to where it was, but if we look at forward curves, we should see some decline. One thing, and then I want to shift gears here for the last ten minutes or so is you mentioned Class A's are going down. That's my issue with Class A. I would love to show on my website and be a proud owner of 200 plus units that are 2015 or newer. I mean, there's some pride owning a quality asset, don't get me wrong. But the concern I have for my risk profile is that when we do go into recessions and new construction is coming online, we're seeing a lot of supply that's competing those rates, and the occupancies tend to go down. Now, if you talk to a Class A operator sponsor, they're going to dispute what I say, and I respect that, but that's just sort of what I'm seeing. I don't see that as much on B and C.
Wayne Courreges [00:30:04]:
If anything, the Class A in a really bad environment are going to be moving into your Class B and going down. So it's just a point you had made about Class A's. You're not seeing the rent hikes.
Jack Krupey [00:30:18]:
Yeah, I agree. I think there's a couple of things. Number one is you are competing with institutional and REITs and publicly traded companies in some cases. So by nature, you're buying at a lower cap rate because there's more competition, more liquidity there. You're buying at closer to replacement cost or at replacement cost in some cases, and that new supply is generally Class A. I think a lot of those tenants could be the tenants if rates drop, that are the ones that are buying a house as well. Not that Class B tenants can't buy a house, but I think you're more likely to have those headwinds. And I think the most important thing about the Class B, the workforce housing, is you're buying below replacement cost.
Jack Krupey [00:30:56]:
A 1980s 1990s asset. The location, it's usually irreplaceable because most of these cities have expanded out a little bit. So you have a great central location. There's not going to be the new supply at that price point. So overall, there's a lot of great tailwinds and a lot of great reasons to invest in the Class B assets. I think it's really the sweet spot.
Wayne Courreges [00:31:22]:
Yeah, that's pretty powerful. We haven't even mentioned replacement costs. You just did. That's huge as well. So let's shift gears. As a passive investor yourself, but also a person who helps other people grow wealthy real estate through your funds. Talk to us about taxes on conferences I listened to you at previously. Not everyone's going to be able to just get up and move to Puerto Rico for taxes, but would love to spend the next 510 minutes or so sharing your experiences and what you see as benefits of investing in real estate from a tax standpoint.
Jack Krupey [00:32:03]:
Yeah, absolutely. It's super powerful. And again, I took a pretty extreme step. I had the flexibility to do it, but it's something that I was surprised as I've talked to thousands of investors, people making ranging from making seven figures a year to having built up a couple of million bucks or more in funds and still working at W Two.
Wayne Courreges [00:32:26]:
That.
Jack Krupey [00:32:29]:
More people than I thought, just don't really understand it. And even me, if you look back, I'd been in real estate and all of a sudden I got thrust into Wall Street and I kind of didn't know. I didn't even think about it because when I started in real estate, I really wasn't paying taxes. So the most powerful thing about real estate is you can show a loss through depreciation, which is a paper loss, while getting positive cash flow. Now, passive losses through real estate cannot offset, in most cases, can't offset your W Two salary, although there's a few loopholes for that. But it is passive. So you can build I mentioned building that pyramid. So simplest example is if you make a million bucks a year, if you're a doctor making a million bucks a year and you have nothing else, and you just invest in real estate and you're making say, 8% to 10% a year in cash flow, that's likely to be completely tax deferred.
Jack Krupey [00:33:23]:
You'll get $10,000 in your pocket, and your loss on paper may show $100,000. And then so for the next five years to ten years, you're burning off that loss. Where it gets more powerful is most people that are making a million bucks a year have some other passive income. Maybe you bought one or two rental properties and you're earning 100 grand a year on your rental properties. But it's a pain. You're busy with your work. You're working 60, 70 hours a week. It's not worth buying another rental property.
Jack Krupey [00:33:51]:
It's not worth your time. Now, if you invest into a real estate syndication and you get that loss on paper, and often it could be 50% to 80% of what you invest. So you take $100,000 investment and you get an $80,000 tax loss. Instead of having to pay tax on your rental property income, it's now wiping out that other income. And again, I'm not a CPA to give official tax advice, but the tax deferred income is very powerful. And one of the simplest things is if you own REITs, if you're in the highest tax bracket and you own REITs, you need to yell at your financial advisor because they're not doing a good job, because REITs are taxed at 29.6%, because REITs are not what's called a qualified dividend. If you own Apple stock, you're paying the 15% dividend rate, but REITs are going to be taxed at 29.6%, whereas a real estate syndication, you're going to show a loss. You'll have tax deferred income for pretty much the entirety of when you own it and when it sells, there is a Recapture and then there is a capital gain.
Jack Krupey [00:34:55]:
However, that's typically capital gains is 20%. I think Recapture is 25. This can get a little more complicated, but at the simplest level, if you reinvest your profits into another deal, you take another loss and you could in many cases, defer taxes until you're in retirement. And that's one of the more powerful things as well, because most accredited investors are, say, the average accredited investors in their 50s. Maybe you're starting to think about retiring in five to ten years. If you're in New York or California and you're at that 50% tax bracket and you're building up these losses. Now when you retire and you move to Florida, you move to a state with no state income tax, and these buildings sell in five years your tax rate, you might pay 10% tax when it sells. If you're showing a loss and you make less than 80,000, the capital gains is tax free.
Jack Krupey [00:35:49]:
So there's a lot of efficiencies. It's the type of thing you really if you're sitting down and figuring out your retirement plan, it's an amazing piece of your overall retirement plan.
Wayne Courreges [00:35:58]:
Absolutely. And one thing too is if you have those other properties that are taking a lot of your time and you're looking to shift that into more of a passive, you can 1031 that as well.
Jack Krupey [00:36:12]:
Absolutely. That's a great point. Thanks for I forgot to add that. And yeah, you can 1031 into some syndications as well, into larger syndications with a very experienced management team. Generally, at least for the ones I'm involved in, it needs to be about a half a million dollars in proceeds. But in many markets, that could be one single family house.
Wayne Courreges [00:36:32]:
Agreed. Well, as we close up, here a lot of great content. Thanks, Jack, for sharing so much. What is one of your proudest moments in real estate investing and how can people reach out to you?
Jack Krupey [00:36:45]:
So I think the thing it's not just one moment, but I've got a lot of people into this business full time. I've always been an evangelist. So in my twenty s, I got people into house hacking, buying some rental properties, living in half. I got a lot of people into the non performing loan business early on because there was a lot of people pivoting from real estate. So when I look around now and can count the people that are supporting their family are reaching their retirement goals or have learned the business, that's really what I'm most proud about as I've aged and my interests have changed. Now it's about just helping people find that efficiency, the tax efficiency, the passive income, just the options that are outside the traditional financial system. I think far too many people are stuck in that stocks and bonds and index funds and just don't have enough exposure. The average family office or somebody worth 50 to 100 million has half of their money or more in private equity and real estate.
Jack Krupey [00:37:50]:
Whereas the typical accredited investor that's maybe worth one to 10 million usually has 90% of their money in the stock market. So I want to change that. I want to help people. I want to provide more information. Our funds are built around that. Our first fund, we made 30 investments in the syndications all within one fund. So shameless plug here. But the value proposition is someone who's going to put if you have 100,000 and you want to put it into your first syndication, do you want to pick one deal? Do you want to say, okay, I'm going to put this just in a Dallas apartment or just in a Jacksonville apartment, or do you want that diversification across multiple groups that I've personally vetted, that I have my own personal money with.
Jack Krupey [00:38:33]:
So that's our value proposition, and I'm really trying to build my own community as well. We have our podcast and Wayne, I'd love to have you on, it's called Alternative Investor Mastermind and I'm on social media, Facebook, LinkedIn, just personally, as well as our JCAM Investments page. And we have a Facebook group for Alternative Investor Mastermind, so I'd encourage people to reach out. We do have a number of ebooks and guides as well, so a lot of free content that we're happy to, you know, reach out. We love to network.
Wayne Courreges [00:39:04]:
Yeah, sounds great. We'll put those links in the show notes as well. Man, we could have got another hour on non performance. I wish we talked more about non performance loans too. We could have kept it going. We do another one.
Jack Krupey [00:39:17]:
We could do it again. We could do a multiparter or like part two. Happy to do it.
Wayne Courreges [00:39:21]:
All right. Hey, thanks Jack. I appreciate you being on listeners. His contact information will be in the show notes and excited to see you at an upcoming conference. Jack, thanks again for your time.
Jack Krupey [00:39:31]:
My pleasure. Thanks for having me.
Introducer [00:39:34]:
That's all for this episode. We hope you subscribe, share and leave a review of the show. For more information about passively investing in multifamily apartments, check out Wayne's free ebook by going to forward slash ebook. Also follow us on Facebook by searching CREI partners. This was the untold stories of real estate investing.
