February 15, 2023

JF3086: Investing for Stability in Unstable Times ft. Jack Krupey

Jack Krupey is the founder and principal at JK Asset Management, a firm focused on sharing private investment opportunities with accredited investors to help them grow their wealth without Wall Street. From working with a private equity fund on Wall Street during the 2008 crash to discovering and falling in love with syndications, Jack has been investing in both real estate and distressed debt since 2001. 

In this episode, Jack discusses the state of the multifamily market, as well as cash-flow alternatives such as new construction, ground-up senior living, and build-to-rent. He also taps into his Wall Street experience to gauge the likelihood — or unlikelihood — of a housing crisis.

Jack Krupey | Real Estate Background

  • Founder and principal at JK Asset Management, a firm focused on sharing private investment opportunities with accredited investors to help them grow their wealth without Wall Street.
  • Portfolio:
    • Excluding funds: 1,132 units
    • Including funds: 6,100+ units, including a 20,000-unit self-storage fund
  • Based in: San Juan, Puerto Rico
  • Say hi to him at: 
  • Greatest Lesson: You have to put yourself out there, whether it's direct-to-seller marketing or finding opportunities. You have to commit to the system, whether it's sourcing the off-market deals, putting out content to provide value to your target investor base — whatever it is, fully commit to it.


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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm here with Jack Krupey. Jack is joining us from San Juan, Puerto Rico. He is the founder and principal at JK Asset Management, a firm focused on sharing private investment opportunities with accredited investors to help them grow their wealth without Wall Street. They have placed capital with a significant number of high-level operators. Jack prefers to be humble about the unit count, but it is in the tens of thousands with regards to places where they have placed their capital. Jack, can you tell us a little bit more about your background and what you're currently focused on?

Jack Krupey: Sure. Thanks for having me. It's really great to be on the show. I got my start in real estate - it's been over 20 years at this point. And I started shortly after college, just doing single-family, small multifamily rentals, and realized the scalability concerns very quickly. I built it up to about 20 units, and created myself a stressful second job. And then fortunately, in 2008 I landed at a private equity fund in New York. during the financial crisis they were buying up portfolios of bad mortgages, and they needed real estate people. People that had done short sales, and bought at the foreclosure steps, and had done a fix and flip... And they needed us, because there was a bunch of bankers buying loans that they didn't really know what to do with... So I had a 10-year-plus career in private equity in New York City and bought over $3 billion of mortgages with a large private equity fund. And during that time, I was living in New York, I was paying a 50% tax rate with a high cost of living, and eventually just kind of burnt out. And I was fortunate to start investing in syndications just as a passive investor while I was in New York, because I needed something other than mortgages to invest in, because I wasn't allowed to... And I really fell in love with the syndication space.

I moved to Puerto Rico in 2018, and then eventually got bought out of that prior firm, so I had a pretty decent liquidity event, and I had a lot of my own capital to invest, which I started investing into syndications. And eventually, I really just built the business, JK Asset Management and JKAMInvestments.com around my own personal investing into multifamily, storage, mobile homes, and really all of the traditional syndication classes... And it's been a great run the last couple of years, and it really is the perfect business for me.

Slocomb Reed: That's awesome. It seems like a lot of natural transitions in your life have led to where you are now.

Jack Krupey: Absolutely.

Slocomb Reed: We are recording at the very end of January 2023, an interesting time to be in commercial real estate investing, to say the least. I've said this on other episodes, but there are a lot of high profile investors with some high profile opinions about what's going to happen in 2023. I'd like for that to be part of the direction we head in, Jack. Let's do that now. I'm not going to ask you to pull out your crystal ball and make bold predictions for what's going to come down the pipe. What I would like to ask though - we were talking a little bit before the recording, and you and I met actually at the Best Ever Conference in 2022. I got to know you a little bit there as well. You're in a position where a lot of operators and general partners are putting deals in front of you and your firm, and a lot of investors are coming to you looking to place capital. Recently, have you experienced a shift in the deals that are reaching your inbox, and the investors who are looking to place capital?

Jack Krupey: Absolutely. There's definitely been a shift over the last few months, and it really depends on the market, but cap rates have expanded; at least the deals we've participated in. We actually have a deal currently that has a 7.5 entry cap, which is unheard of. And there are some deals even in markets like Phoenix, where the cap rates are creeping into the fives... And I think overall, there was a point in 2021 where a lot of deals, just - the offering memos and the standard terms just had almost no cash flow in the first year on a value-add deal; that was becoming somewhat normal. And lately, just by using lower leverage fixed-rate debt, entering deals where the initial interest rate is not higher than the cap rate, we are starting to see some deals with current cash flow, and on the investor side, investors, our limited partners and our passive investors are definitely concerned. A lot of people see the headlines on CNBC, or reading whatever their internet site of choice is, and a lot of investors actually conflate what's happening in the single family market with the apartment market.

Slocomb Reed: [unintelligible 00:05:47.16]

Jack Krupey: Exactly. So interest rates going up is certainly a challenge in the multifamily side, but as someone who lived through the 2008 crisis and worked on Wall Street during the crisis, I do not see any sort of residential housing crisis; nothing like 2008. And the big reason is there's not going to be the supply... And that's going to be a stabilizing factor in the multifamily space. Single family houses may drop 5%, 10% in some markets that were crazy bubble markets post COVID, but overall, 40% of the population does not have a mortgage, 30% locked below a 4% interest rate... So there's just not going to be this fire sale of residential houses, because most people can afford to just wait out the interest rates and just choose not to sell.

So that overall is very bullish for multifamily, especially in that class B value-add space that a lot of people play in, where that tenant base is just going to be priced out of buying a home for potentially a number of years... So overall, I think the overall factors are still very bullish; short-term those that bought with very low cap rates a year ago, right before rates moved, are gonna have to do a lot of value-add to sort of work their way out of the deals... But if inflation persists, and rates do come down in the coming years hopefully, a majority of those that bought, even in mid-2021, are going to be able to execute their value-add plan and still have a profitable deal. Those that messed up on their entry comp and aren't able to fully execute their value-add plan and increase rents and increase NOI, those are the people that may be in trouble in a year or two if they have bridge loans and that debt comes due.

Slocomb Reed: Are there certain markets now -- now that you're talking about seeing... You said a 7,5% entry cap rate; are there certain markets where you are seeing deals have gotten significantly juicier in the last few months?

Jack Krupey: Yeah, I think the secondary and more tertiary markets, those cap rates were always a bit higher to begin with. So those have expanded. And then the really, really juicy markets, things like the most competitive markets, the Phoenix, the Dallas, Las Vegas - we've seen some expansion, but that 7.5% cap was in Fayetteville, North Carolina, not in one of the top 5 or 10 MSAs.

And we're also starting to see a little bit of a shift away from the heavy value-add, just by nature of looking to enter with fixed rate debt; it somewhat lends itself to a slightly more stabilized deal... We're also seeing some assumptions; those that locked in really good debt terms are able to market those properties, and get a little bit tighter of a cap rate, because they have 3% fixed rate debt for a period of years. So that lends itself to a little bit more of a stabilized deal, because you're not using a bridge loan that you can build in the construction and rehab. You've got to raise the additional capital for any renovation. So it's leaning itself a little bit more to stabilized deals, with lower loan to value and current cash flow... And cash flow is very important right now, both to US and our investors. Deals that have a current cash on cash return that's solid is a big, big plus. I think investors are looking for a little bit more certainty, a little more safety, given some of the other uncertainties in the market.

Slocomb Reed: Buying more stable properties in an unstable time... It makes a lot of sense, all things considered. It's a fairly amalgamous term, risk-adjusted returns... I'm wondering, looking forward, Jack, how are you adjusting the way that you look at risk in a deal? I think you've already started to answer this question when you said that you're not as interested in deep value-add, because deeper value-add often requires bridge debt or shorter term that, and looking at a refi at some point during the whole period. What doesn't feel risky to you right now, and what feels risky that didn't two years ago?

Jack Krupey: Two years ago a Phoenix value-add with a sub 4% cap rate did not seem that risky if the rents had $300 to $500 of room to increase. Six months ago and really now, a cap rate that's below what the current interest rate is, or significantly below, even if there's a ton of room in the rents, gives me a bit more pause... And just deals that don't have any current cash flow for a period of time - that gives me some risk.

For example, if we're going to have no cash flow, I'd almost rather be in a new construction deal where if you're building to, say, a six and a half cap, because you know you're at least building to a certain price, and that price should ideally be a significant amount below market... So there comes a point where if we're not going to have cashflow for 12 or 18 months, do we want to be buying something that is building below current market value? Or do we want to be investing in a value-add deal where assuming it's very much below replacement cost, if it's a heavy value-add, but at the same time without cash flow, at some point it's like, "Would you rather just be building?"

So those are things we balance, and we're across the portfolio trying to balance being in the prime markets where I think long-term we're going to have significant rent growth, and balancing that with some secondary and tertiary markets where we're going in with solid cash flow, and we don't expect rents to double by any means, at least organically, unless we're doing crazy renovations on them... But we have a slow and steady cash flow to balance out any adjustments that might happen in markets that are a little bit more boom/bust. But even as I say boom/bust, Vegas and Phoenix were the boom/bust markets of the last cycle, but I don't necessarily think they're the boom/bust markets of the future cycle. There's population growth, and job growth, and surprisingly to me, the amount of casino-oriented jobs in Vegas is a much lower percentage. I don't have the exact quote in front of me, but it's well below 40% of the jobs in Las Vegas are tied to the casino industry at this point, and the hospitality. So it's becoming a real city, with real diverse infrastructure at this point.

Break: [00:11:52.17]

Slocomb Reed: Jack, you talked about if you have to go without cash flow for a while, you may as well be in a construction deal. Are you all placing capital in construction deals right now?

Jack Krupey: Selectively. We're in a few different construction deals. We like deals that have a bit of a story to them, but are also repeatable. So we're in a ground-up senior living deal, which we got into right in the middle of COVID... And my first thought is "Do we want to be involved in senior living during COVID?" But in fact, the newer construction in senior living is actually safer, because they're building with the proper negative pressure HVAC systems, so that any of the germs or anything is basically segmented, so it doesn't spread between the different rooms. The type of facility being built, they built five other ones with almost the same exact floor plan; it was almost like building a franchise or building a Holiday Inn Express that looks almost the same, and they built them across the Midwest. So to us it's a very safe construction deal.

We're taking a look at the build to rent space, and I'd be specifically interested in those types of deals that have a takeout already... And the ground-up rental apartments, if the comps makes sense, and there's a housing shortage, and you know, you're building to a certain cap rate that's well above where it should sell in the current market - those deals get very compelling.

Certainly, we don't really look at anything that's not shovel-ready, just because that's just not the type of capital that we're generally raising at this point. But there's still a systemic housing shortage that hasn't recovered since 2008, and I think there are likely to be some compelling deals when -- the deals that pencil will be very compelling. Those that don't due to construction costs or high interest rates may continue to have challenges getting funded.

Slocomb Reed: Jack, an underlying theme in what I'm hearing you say right now - this is a gross oversimplification, please don't judge me for it... But the underlying theme that I'm hearing is "Right now, because the market is more turbulent, we are being more conservative." I asked about the seven and a half percent cap rate, you said Fayetteville, North Carolina; I asked about construction, you said you're being selective, and working with solid operators... I think the general question here that I really want to ask is when you can get in front of as many deals as you do, Jack, and you're focused on placing capital more conservatively, and looking for greater stability in tumultuous times, where are the juicy returns right now? Where is it that you're seeing returns that get investors excited at a time where everyone wants to be more and more conservative and safe?

Jack Krupey: That Fayetteville deal I mentioned, I think none of it is rocket science. It was an off market deal, it was - a grandfather had built a portfolio, and it was sourced off market, the family was selling... And those deals are still out there, and the reason that we're not an operator ourselves competing is because I know you need to spend thousands of hours and look at hundreds of deals to find that one or two diamonds in the rough.

So I think first things first is the good deals, the juicy deals have always been out there, and it's just a matter of - to get those deals you're either really pounding the pavement for off market deals, you've already built a reputation, you're getting that first look or that last look from the brokerage community... Because even off market deals often at least have an agent who has a pocket listing, or the seller at least is talking to an agent. It's very, very rare for a 100-unit plus deal that you're going to negotiate exclusively with a seller.

So the off market multis that are the true value-adds that were built in the '70s or '80s and not really renovated are still out there, it's just sometimes you need to go through hundreds of them. That ground-up - we're in a ground up self storage deal that was a local partner who came through a capital fund, so they've got a local construction guy who needed the funding, and we syndicated the deal, or they syndicated the deal and we participated...
So it's really the niche opportunities. I don't know that there's that much secret sauce to it, it's just the hustle to find the deals, and this combination of just good deal sourcing on the value-add, and then selectively diving into, say, ground-up, or even triple net sale leaseback. We participated in a deal last year, a owner-operator built a light industrial, a little bit of office space, but also some warehouse and storage space... And it was 60% full; they wanted to sell it so they can build something else, because they have a higher margin building. So buying property with some lease-up risk, and they left a lot of meat on the bone, and we invested in that deal. Within six months it's fully leased, and just waiting for the right time to refi... With the 10-year stabilized a bit, and the 10-year hasn't moved nearly as much as the two -year... So I'm trying to time it right to lock in some long-term debt, and that's going to be a great deal for us, too.

So I'm sorry, I don't really have this one secret sauce here, but it's really about the hustle. And if there's a main point, it's just real estate 101 of hustling and finding those creative and off market opportunities.

Slocomb Reed: In my head as a podcast host I was trying to find a way to summarize what you've just said, but Jack, I think you just did it for me, so thank you. Are you ready for the Best Ever lightning round?

Jack Krupey: Let's go for it.

Slocomb Reed: Awesome. What is the best ever book you recently read?

Jack Krupey: I actually re-read The Four-Hour Workweek recently. It was something I read in 2008, and it was really somewhat life-changing at the time... And I actually just kind of poked through it again, and a lot of it still stands up. It's funny that was like the beginning of virtual assistants, maybe for a lot of people, and now seeing how ubiquitous it is now... It was great to go back through it.

Slocomb Reed: Yeah, life-changing book for me as well, especially with virtual assistants. Half of everyone who works for me right now is virtual in either Mexico or the Philippines. What is your best ever way to give back?

Jack Krupey: So I'm involved in a few different charities in Puerto Rico. A lot of us have moved to the island the last three to five years, and there's the [unintelligible 00:18:31.24] Society which actually donates to a number of different causes on the island. On a more practical level, I love to teach and mentor and work with investors at every level of real estate. I'm just a big proponent of that lifestyle that I've been chasing for 20 years, and in some cases have taken detours more into the corporate world, but I really like to help people to take control of their life and their finances and find their own financial freedom.

Slocomb Reed: Jack, thus far in your commercial real estate investing career, what is the biggest mistake you've made, and the best ever lesson that resulted from it?

Jack Krupey: I've certainly made plenty of mistakes... I think failure to commit to marketing early on - I cost myself a lot of time and a lot of opportunity cost. Probably about two three years in we were pounding the pavement, trying to find deals, and then I eventually sent out these yellow postcards [unintelligible 00:19:23.00] "We buy houses" postcards, and I was afraid to spend $700 on a mailing, and over the course of that $700, once we finally sent it out - and we stamped them ourselves. We literally bought a roll of stamps and mailed them out, and we made over six figures on that mailing in the early 2000s, just buying properties wholesale, and renovating and selling. So the lesson was that you have to commit to marketing.

In recent years I was a little reticent to put myself out there on podcasts, and do the social media, and even still, I'm not taking as many pictures at events as I probably should... So the results have spoken for themselves. I had a LinkedIn posts go viral when I posted my tax return loss, and with a headline that I booked a $1.4 million loss and couldn't be happier. And just the amount of feedback, positive, that I got from just putting myself out there was amazing.

So the best ever lesson from it for sure is that you have to put yourself out there, whether it's direct to seller marketing for finding opportunities, and fully committing to it. I'm in a mastermind where people are text-messaging to residential property sellers, and building systems around it. You have to commit to the system, whether it's sourcing the off market deals, whether it's putting out content to provide value to your target investor base... Whatever it is. You can have the best product in the world, but if not enough people know about it, you're not going to be successful.

Slocomb Reed: And what is your best ever advice?

Jack Krupey: It's you've got to take action. I know a lot of people, including myself - at one point I built myself some golden handcuffs. I had a very successful private equity fund that I was a partner in, but I trapped myself in with the golden handcuffs for a few years... And you've got to take action. There's a place in real estate investing and investing for everyone. If you're an extrovert and going to be out there shaking hands, kissing babies, talking to investors and sellers, that's great. If you're a spreadsheet person and never going to be a public speaker, that's perfectly fine as well. Every wild and crazy extroverted investor salesperson needs somebody to help with the back office. That's so especially the case in this investment and syndication market that there's room for any number of personality types, and it really is needed. Real estate is a team sport. So take action, go to events like Best Ever, find your group, find your tribe, and put the effort in. There's no reason you shouldn't be successful.

Slocomb Reed: Last question - where can people get in touch with you?

Jack Krupey: Our website is JKAMInvestments.com, and we're also on all the social media except Tiktok, which we're still working on. I want to bust out my dance move for Tiktok when we launch it, but we're on Facebook, LinkedIn, Instagram, Twitter, and we also have our podcast, AlternativeInvestorMastermind.com.

Slocomb Reed: Those links are in the show notes. Jack, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this conversation, please do subscribe to our show. Leave us a five-star review and share this episode with a friend who you know we can add value to as well. Thank you, and have a best ever day.

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