Power in Partnership: Co-Investing in Multifamily Syndications for Real Estate Success

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This is a podcast episode titled, Power in Partnership: Co-Investing in Multifamily Syndications for Real Estate Success. The summary for this episode is: <p>Not all partnerships are equal, but they can all create profitable investment opportunities!&nbsp;</p><p><br></p><p>This week,&nbsp; <a href="https://www.linkedin.com/in/jackkrupey/" rel="noopener noreferrer" target="_blank">Jack Krupey</a>, Principal at <a href="https://jkaminvestments.com/" rel="noopener noreferrer" target="_blank">JKAM Investments</a>, shares invaluable insights on creating partnerships in investing and expanding your portfolio.&nbsp;</p><p>Discover the potential of B and C class-type units and the advantages of co-investing in syndications. Gain clarity on general vs. limited partnerships and understand the significance of preferred returns for investors. Explore the power of networking in real estate mastermind groups and the impact of bridge loans on the multi-family unit market. Stay updated on the evolving landscape of raising capital in 2023 compared to 2022. Lastly, uncover the benefits of understanding distressed debt and the financial advantages Jack enjoys by living permanently in Puerto Rico.</p><p><br></p><p>Join as we discuss:&nbsp;</p><ul><li>Identifying “lower-value” multi-family units to use to your advantage</li><li>General vs. limited partnerships and where you should be in each&nbsp;</li><li>What bridge loans can mean to your investment&nbsp;</li><li>Understanding distressed debt in 2023 compared to 2022</li></ul><p><br></p><p><br></p><p>Rate and review the podcast wherever you listen like <a href="https://podcasts.apple.com/us/podcast/real-estate-of-things/id1583817903" rel="noopener noreferrer" target="_blank">Apple</a> and <a href="https://open.spotify.com/show/1dXWI6nxbw2X3D3ovc7q1N?si=e948324f313b433b" rel="noopener noreferrer" target="_blank">Spotify</a>!&nbsp;</p>

Nate Trunfio: Welcome to another episode of The Real Estate of Things podcast. I'm your host, Nate Trunfio. This week we have Mr. Jack Krupey on the line with JKAM Investments, a capital raise aficionado, a ton of experience in distressed debt to active investing himself. We cover a plethora of topics all the way from raising capital, the numerous structures you can do with GP and LP, some of the targeted yields that each side requires and requests, as well as is it easier or harder to do so? We'll dabble a little bit into some of Jack's background on distressed debt, look at his crystal ball on what to expect here upcoming. And then lastly, Jack lives in Puerto Rico. So why and what are some of the advantages of doing so? Let's get right into the action now. Welcome back to another episode of The Real Estate of Things. I'm your host, Nate Trunfio with Lima One Capital, and we have a good friend of mine, Jack Krupey in the house today. Jack's been investing in real estate and distressed debt since 2001. He's been an asset manager for a private equity firm of$ 3B plus of non- performing and re- performing loans. Super knowledgeable in the realm of debt, but also in the realm of operating and equity investing. I consider you Jack the capital raise aficionado, and I really always appreciate your network and your knowledge base because it's very wide and I'm excited to share that with our listeners here today. So Jackman, welcome to the Real Estate of Things.

Jack Krupey: Nate, it's great to be here.

Nate Trunfio: Well, let's get her started, brother. So I want to start with what you're doing right now. So JKAM, break that down for us. What are you currently doing and take it from there.

Jack Krupey: So JKAM, we manage two different funds that are Regulation D506Cs, so we work with accredited investors and we primarily co- invest into apartment complexes with a little bit of self storage and other syndicated asset class. But our core is to buy a 100 to 300 unit tired apartment building, maybe built in 1975, 1980, 1990, but just a building that's not necessarily distressed like it's 80% vacant, but just it's a little bit old and tired and the prior ownership wasn't really renovating or raising rents or getting all of the value out of the building. So we focus on value add apartment buildings, and these are generally buildings that we're buying well below replacement costs because with current interest rates, current construction costs, it's really difficult to build a new apartment complex unless it's a very high end, what we'd call a Class A. So we take the Class B or Class C +, renovate unit by unit over the course of a few years. And when you're buying at a 5% cap rate as an example, if you can raise rents $300 to $400 a month on a renovated unit, that's almost $5,000 a year. And at a 5% cap rate, that's almost $100,000 in increased value for perhaps a $10,000 or $15,000 unit renovation. So when you compare that to a single family house where very rarely are you putting $15,000 in and raising the value by $100, 000. It can happen in certain markets, but I think that's a difficult task. That's our primary business and we focus heavily on the capital side. These are large deals where you're raising sometimes $10M or $15M and we work with a number of partners and by pooling money together in a syndication, we can generally get better deal terms because we're part of a syndication and part of a syndicate. If you're writing a check for $500, 000 you get better deal terms than if you're just going in yourself for $25,000 or $50,000. So that's really where JKAM functions. Sourcing, we've got a number of trusted partnerships. I've been doing this a long time personally before we started it as a business. And even with interest rates moving, it's been a really good run the last couple of years.

Nate Trunfio: Awesome, man. Well a lot to dive into there. And so where I want to start is, can you just break down a little bit more how co- invest in syndications that you do for yourselves and for others? Break that down in a little bit more detail.

Jack Krupey: Sure. So a typical syndication, there's a general partner and then there's limited partners. And the general partner typically takes a promoted interest or a percentage of the profits that's higher once they've actually successfully completed the project, they've returned to all investor capital and then the profits generally get split. It could range from 50%/ 50% to 90%/ 10%, but I would say 70%/30% with 70% going to the passive investors, limited partners. And generally 30% of the profits going to the general partner. And there's typically also a preferred return that's paid. It's not debt, it's not guaranteed to paid an exact amount quarterly, but it does accrue. So that may range from 5% to 12% with 7% or 8% being I'd say average. And what that means is if a passive investor puts in$100, 000 and the project takes one year, if it's an 8% preferred return, they would need to get paid back$ 8, 000 at the end of the year plus have a return of their$ 100,000 of capital before the general partnership gets any of the profit sharing, that 70%/ 30% split. Now realistically, these deals tend to take three to five years, and often the first year or two, there's not enough cash flow because you're focused on renovation. So in that scenario, on that same$ 100,000 you may accrue over three years, $ 24,000 in payments that need to be paid. So then you need to get back your$100, 000 plus your 8% annual before the sponsorship makes any money. And the way JKAM fits into that is if we're bringing in a larger check, we may be able to negotiate an 80%/20% split instead of a 70%/ 30% split, which just means that we make more money ourselves. Or in the other scenario, we're actually part of the GP and we're a co- GP, meaning we actually get paid on the sponsorship side and we sometimes bring our investors along through our diversified fund. We actually bring our investors along and any of those fees and any of that profit sharing we get actually goes into our funds. So our investors get to participate with us on the co- GP side of the deal, which is a really powerful investment strategy.

Nate Trunfio: No, so that's awesome and I just appreciate you breaking it down from as high of a level as you can because this stuff gets complicated quick for most of you listening in. Really interested on this perspective because I always found it unique that you're raising money in an LP component but also in a co- GP component. So how do you look as a fund manager, asset manager of funds that can do both? How do you look at deals or opportunities as an LP versus a co- GP? What's the differentiator for you, man?

Jack Krupey: Yeah, so when I first started, I was just an LP. I still was working, I still owned a piece of a private equity fund that was buying distressed loans and I have a non- compete, I couldn't buy loans myself because it would be a conflict of interest. I'd been a landlord, I'd done a lot of single family, I didn't have the time or the bandwidth and I was living in New York City and there was no place for that for me. So I started investing passively into multifamily syndications with a guy I knew from Long Island, New York that was buying down in North Carolina and South Carolina. So I just started as an LP and it was really a lot of just networking. The first group I invested with was someone I knew from a New York City real estate investment club over a number of years, got on his email list, followed along, met him for coffee a few times and he's probably on his fifth or sixth deal before I threw in$ 50,000. And things went well. I joined a lot of organizations. I'd been in a few deals with other people I met through clubs. But as I am speaking right now I'm actually in Cabo San Lucas for a real estate mastermind that it actually starts in a few days. I came a few days early. But yeah, I've spent well over six figures joining mastermind organizations that are generally$ 20,000, $30,000 a year to join. And there's a lot of really strong operators that are there to network. And there's that whole saying" iron sharpens iron." So the groups that we invest with are highly vetted, very rarely are we... Well, there's not been a case where I've gotten an email about just a random deal and just invested with it. We're invested with groups that have strong track records where we know there are other investors and that just, they're not coming off the street.

Nate Trunfio: No, awesome man. And being a lending nerd myself, if you will, which I hope you don't mind, I'll call you one too, it's easy. It's very easy to then put on that sort of lending credit mindset to then analyze a partner that you'll invest your money in because it's almost the same thing if you're lending a credit versus taking an LP position. So I'm sure that's a natural knack for you to do a very diligent due diligent process on who you invest your money alongside. And so then hit me on the co- GP. At what point in time would you and JAKM take the co- GP position? Is it more because of just the desired requests and the capital needs from the GP operator, they need maybe more money and you take LP and co- GP or is it more because of you finding a deal or how does the co- GP element differentiation come into play?

Jack Krupey: Yeah, so it really depends on the scenario and a lot of it has to do with how much money is being brought into the deal. And also, even if on one specific deal we're not writing million dollar checks, we're a programmatic investor, we have groups that we've invested in six or seven deals with so they know that... And most of the time these are groups that we've already vetted, had a lot of success with already and they've got a good eye for finding new deals. So a majority of the new deals that they find, we think pretty much the same way and they know what to bring to us. We do get some credit in some cases just for being a consistent investor and part of the co- GP is just getting better terms. Often the legal docs are what they are and sometimes there's different share classes where if you put in over$ 250,000 you get a little bit better deal. But in a way, the way to really negotiate better terms is to be a co- GP and be a partner in the deal and get a piece of the fees, which actually works out to be a fee rebate in some ways because at least for our diversified fund, we actually put those fees into the fund itself. We do charge some of our own fees. So in a way it offsets most or in some cases all of our fees. If the deal outperforms and we're getting a piece of the carried interest, we may do better than if a passive investor put$ 50,000 directly in without any of the fees. So we do it in a few different ways. Number one is to just make sure that we're being fee conscious to our own investors, that there's no reason for them to give us money if we're just going to blindly put it in passively. Although diversification is worth something but we want to add that extra value. The other aspect of it is just to have a seat at the table to get a little bit more insight and reporting than say a random dentist or doctor who's just putting$ 50,000 in just because we're consistently investing and they do value our opinion and even just advising on what's happening in the market and what the investor appetite might be at the moment because a lot has changed over the last year or two. Even with investor appetite, I think there's more of a push for current cash flow and a little less for appreciation after what's happening with rates and certain deals are not really distributing what they originally had thought just because of the five point move in interest rates over the last year.

Nate Trunfio: So that makes some good insights and it makes sense. Again, I think it's great and cool and unique as well that you have that opportunity to invest in those numerous capacities depending on a number of different variables. And as you listen to this and hoping you understand it, but to break some down more is GP who takes a more active role in the management responsibilities and rights, assuming all things go, you should get paid for that work. Whereas an LP is passive and it's more fixed returns because you're just sort of the capital partner on the deal. And so again, as you listen to what Jack just said there, it's a way to enable yourself to earn some more yield for you in the fund as a GP versus LP. I think at the end of what you just said there, I really want to get into this topic of" things have changed." So in regards to just expected yield and returns in any realm of LP or GP sides of a deal, what has changed over the last year? We're in almost the middle of 2023, what's gone on in the market and how has that affected, well, we know what's gone on in the market, how has that affected the capital raise and yield side?

Jack Krupey: Yeah, so I mean there's definitely a lot of fear in the market right now from passive investors because there's been some headlines about bridge loans, and bridge loans on this large multifamily are a little different than bridge loans say on the single family fix and flip. On multifamily, the typical way up until a few years ago is most people would go in with five- year fixed rate debt or 7-year or 10- year fixed rate debt and there were substantial prepayment penalties. So if you wanted to sell early or if you wanted to refi, you were really stuck and it was very inflexible. The benefit though was it was largely a fixed rate for the entire term. What's become more prevalent in the last few years was bridge loans and bridge loans had variable rate debt, but they also had the ability to purchase insurance for an interest rate cap and up until a year, year and a half ago, rates, SOFR, which is based at what basically was LIBOR is being replaced by SOFR, which is pretty much tied to the Fed fund's rate. So when you see the headlines about the Fed raising it 25 basis points, SOFR pretty much moves 25 basis points as well. So those loans were tied to SOFR with a spread so they were essentially only a few percent interest rate. Then investors bought a cap where if it went up 3%, it basically couldn't go up more than 3% over the life of the cap, which was usually three years. And what happened over the last year is all of those loans hit the interest rate caps within nine months. So deals that were expecting to pay a 5% current return each year just off of the rents that were coming in, all of that extra money got eaten up by interest rates. And in some select cases for operators that didn't buy an interest rate cap, there were deals that now had negative cash flow. We're fortunate across 30 plus deals, we have very few, there's maybe one or two deals that cash flow is any sort of a concern. The remainder, there's enough cash to pay the mortgages and the property management and insurance, but there's probably not going to be distributions until rates drop or until we sell or refinance. Now, you know may ask now why bother with bridge? Two key factors here. Number one is there's no prepayment penalties. So if you're getting into that value add where you're going to be spending $10,000, $12,000, $15,000 to renovate the apartment and generate $100,000 in value, you want the ability to sell at the appropriate time, or basically it's the BRRR model just on larger deals, you buy, renovate, refinance, return some capital and repeat. That's the one benefit. The other benefit is these bridge loans will lend you on the construction proceeds very similar to single family. So if you have a few million dollar renovation budget, you could renovate those units and then that cash can be drawn on the line of credit, so it means you have to raise less money, which generally increases all of the investor returns because you don't have to raise the extra few million dollars of renovation. So there are some benefits of bridge loans, but there's certainly some operators that have some challenges currently and that's definitely affected cash flow. The good news is, and when Silicon Valley Bank failed, it's I guess never good news when a company fails and some people I'm sure lost their jobs, but that day, the 5-year and the 10-year dropped significantly, I think almost half a percent. And the logical takeout for these syndication deals is more likely to sell to a family office or a longer term holder. So most of the end buyers once the buildings are more stabilized, are going to use 5-year and 10-year debt. So the good news for the syndication industry is that 5-year and 10-year is significantly lower than where the Fed funds rate is and that really drives where cap rates go and where overall returns will be for the multifamily space.

Nate Trunfio: No, we've seen a lot of this start to play out and I think unfortunately there's more of it that is bubbling up under the surface that we'll continue to see. And I think it's more important than ever that sponsors who've raised money through syndications and have some favorable rate bridge debt regardless of cap or not, you got to be able to crush your original business plan and execute the days of just on the single family side waiting for HPA to rise all ships or compressing cap rates. Doing the same thing in multifamily, probably is not here to bail anybody out in that regard. And so execution is key. When you started off, you said, " LP, raising money, there's a lot more fear in people doing that." So would you say for the average syndicator or a person raising money, is it easier or harder raising capital today, middle of 2023, versus before some of this has evolved, call it early half of 2022?

Jack Krupey: I think it's gotten easier in the last six months. The second half of 2022 was very, very difficult. So it's definitely easier than the second half of 2022. I don't think it's as easy as 2021. Post- COVID, there was a period of time where I hate to, was it the old, is this Alan Greenspan that talked about irrational exuberance or something? I don't know if it got to that level, but there was generally an optimism. Stock market was booming, a lot of people got PPP money or various other money. So I think there was a lot of money floating around and people looking for returns and it was a good run. I think for that six months of 2020 people were just scared. You'd see a headline on CNBC about just real estate crash or this, that, and I think people are starting to come to the new normal right now and as someone who was on Wall Street in 2008 during the financial crisis, I don't foresee any sort of residential crisis this time around. There's just too many people on the single family market that locked in. I'd read a stat that I think roughly 40% of homeowners don't have a mortgage. I mean there's just a lot of boomers and senior citizens who just have their houses paid off and then another 30% locked below 4% and there's been a lot of new articles recently. There's just supply that's just not going to move unless they're extremely motivated, like a life event. There's people that might have traded up two years ago that why bother or traded down, you could have a 5, 000 square foot house and maybe your kids are out of the house now and you would've bought a townhouse, but why sell and pay a 6% interest rate if you locked in at 2. 8% on your big house? Just better off staying put another couple years. So that is what I see will stabilize the residential market and that trickles down into the multifamily apartment market because we're especially focused on workforce housing. These are maybe median income, $ 90, 000. It's the people that would've been maybe first time home buyers, but those people are priced out for now. So that actually bodes reasonably well for apartments now. Commercial office space, it's going to be a dumpster fire. It'll work itself out, but it's not something that I see is going to become a contagion to the industry and I don't think it affects multifamily negatively. And the other point is the banking side. Fortunately you've got a lot of private lenders including groups like you that play in some scale of the multifamily but even on the larger scale. And you have the government entities, Fannie, Freddie, HUD, as well as a number of publicly traded companies. So multifamily lending, at least in the areas we've played, there was not a lot of regional banks competing for the types of loans on the buildings that we've invested in. So I feel pretty good that they'll still be continued lending liquidity for this syndication space as well.

Nate Trunfio: Yeah, I mean being on the lending side, I certainly agree with you. Being a private lender as well, we've seen a lot of competition over the last two, three years from regional banks doing things that you would've never expected them to do on similar asset investment strategies that you may be in but that certainly is dissipating now. And you see a lot of headlines on tightening of credit. So some really good perspective there. I'd be interested in this question for you too. So there's a mix of, it's easier, it's harder to raise money and it's depending on what you're gauging and comparing it to. But what do you think, is there a differentiation because of maybe as you talked about some possible more fear of investors, what has happened to LP investors, specifically yield and return expectations? I don't want to give you any of the answer, so help me with that one.

Jack Krupey: Yeah, so I think a couple different things have happened. Number one is up until two years ago there was really no yield if you had money sitting in an account. I mean the fact that you can get 5% on a 12- month treasury, I mean it has caused some investors to just look at, " Hey, I can make 5%." When it was zero versus an 8% pref and a chance to make 20% plus IRR, that was an easy sell. I think for some investors, depending on just what their mentality is in the moment, they see a 5% and their first thought is, " Oh, I can make 5% risk- free." And I would argue it's not really risk- free because inflation is, at least what they publish is still 5%. But if you follow, there's a website called Shadow Stats, which shows how they used to calculate inflation and it's usually at least double if you use the way they've calculated inflation in the 1980s. I mentioned they see real estate headlines, there's investors that just have that fear of, " Is real estate going to crash? Is there going to be another 2008?" So there's a lot of discussions about that and really just where I think multifamily, especially on the workforce side is still a safer way to invest and still has some upside. And lastly, it's like the interest rate fear. I tell investors that even some investors that maybe did invest into a deal in 2021 and now they're somewhat stuck, they're not getting distributions that they might have expected. And hopefully I think largely the deals will still work out where they'll still make a good return because most of the return has always been on the back end of these deals. It was really from the renovation and the exit, not from the 5% or 8% at most from the rents, it was raising the value by$ 100,000 per unit over 50 to 100 units. So just talking through, unless rates go to 10% or 12% or 15% like the 1980s, which if that's the case, I mean where the government debt is right now, I mean there's a whole nother slew of problems, everybody's in deep trouble if that happens. If you really think that doomsday scenario is happening, buy some gold coins, bury them in your backyard and buy some guns and you better just fill up on guns and ammo as an investment. But assuming that's not the case, getting in now to me is probably the safest time to get in. And there's some upside if rates do even drop another point. There could be some significant upside on interest rates just normalizing if the 10- year gets into the twos, the five- year drops somewhere, high twos, low threes, I mean that's just a normal, it gets back to normal where rates have been on and off for the last 10 or 15 years and the market will function pretty well at that point with consistent returns. So those are the main fears that have come up in recent months.

Nate Trunfio: I definitely agree and I think the amount and the ease of raising capital definitely differs based on opinions and what you're looking to do. But you also have just the sheer, like you talked about, influx of capital infused throughout the nation through post- pandemic times and now with inflation continued to surge, people... One of my big concerns in general is affordability, but people's discretionary liquidity is not quite as viable as it used to be. And you had a lot of people that maybe weren't even potential investors before that were over the last couple of years. And I think some in a lot of that's gone away and therefore investors may think they can drive a demand for higher yield in their investments, but there's still a lot of options and opportunity out there. I want to transition a little bit because of your significant experience in distressed debt in the past, and I know you still always stay close and up to date on what's going on there, what's your projection on distressed debt moving forward? What's going to happen, man? I know you got that crystal ball.

Jack Krupey: Yeah, I mean it's broken at the moment, it's on the fritz, but I'll do my best. So similar to the whole interest rate issue with multifamily, I think a similar thing has happened with the more Wall Street buyers of large pools of distressed debt. There was a point where you could securitize, which was similar to a cashout refinance if you will. You accumulate$100M, $ 150M of loans, sometimes complete non- performing or a mixture of non- performing and performing and you could sell bonds up to 80%, or if you got them rated 95% essentially loan to value and that was a cash- out refinance and it was fixed rate debt. Now, that bond market that was 2%, 2.5% or so for the seniors or the what would be more like the first mortgage position is going to be 8% now. So I think that it will shake loose some of the remaining loans that may trickle down to the non- institutional buyers, if you will. And I know through some of the groups that we're both in, I know there's a lot of people play on both sides. They buy real estate, they flip houses and if they can, they buy non- performing loans. So right now, I even saw an email today, I think it's slow, we're in that stage where most of these securitizations had three years, four years before the balloon payments, before they had to be sold. And the one thing is instead, as opposed to one big multifamily apartment building, these portfolios of loans have hundreds of loans or thousands of loans in them. So there is some organic payoff that's probably less now too with the rates moving. So I think what may happen is when it gets down to the chance to either re- securitize or sell, I think more of them may sell. It just may make more sense to distribute them down into, and that trickles down from large funds like I used to be at to there's some more mid- size funds and some groups we both know, and then it trickles down to the mom and pop investor in some cases, especially the lower balance loans and those that are a little more rural, those are often a better fit for the smaller funds. With that said, pricing has also changed too. It used to be that performing loans, at scale you could sell them almost at par, a 100 cents on a dollar for a performing loan if it made 12 payments. Now there are many situations where performing loan is actually worth less than a non- performing loan. If it has a 3% or 2. 5% interest rate, that's a major risk. And even those that are buying, this is the way it was when I first got into the business where you had to price in a reinstatement risk if the borrower came to the table with$ 10,000 or $15,000 and fully reinstated the loan, now you're stuck with a 3% or 4% loan, you can't get your money out. From 2014, 2015 on we loved when they reinstated, we loved to modify and sell them and now it's at a point where you need to calculate if you get stuck with a 3% interest rate. I don't know that rates ever get down to 3% again, at least not anytime soon. So yeah, that's where I see the market. And again, there's still housing shortage, so I think if you do have to take something to foreclosure, as long as it's not completely destroyed inside, I think it's still pretty liquid market for exiting. But we always tried to do, if the borrower could stay and pay, we always wanted to preserve that. And I still think regardless of where rates are, I think anyone who's investing in the non- performing, if the borrower has the means and can afford it, you're better off modifying and working a deal than trying to be unreasonable and pushing the foreclosure, also for legal and other reasons and for the industry as a whole. There's always somebody looking to give private mortgage investors a bad name. I think Elizabeth Warren had something about inquiries about why the government was selling loans to private industry. And as someone who was right in that seat, I saw how we were way more efficient at modifying loans than these bigger box servicers or where there's very strict government guidelines on you're missing one pay stub, you can't get the deal done. Whereas private investors can look at the overall picture and just make a quick exception of yeah, this person could absolutely pay, they're missing a pay stub for whatever reason or their tax return is on extension. There's all these little things we saw when we'd buy portfolios of why a prior loan wasn't modified and it was often just BS, just something that really shouldn't happen and just inefficiencies.

Nate Trunfio: Yeah, true technicalities and there's a lot of them, a lot of trip wires, so always read all your loan docs as a borrower and also as a loan buyer you got to know all sides of what you're buying and your provisions as well. So it's interesting too, I think it's going to be intriguing to see... What a lot of people don't realize, I know you do, is that there's been a ton of money to trillions of capital raised sitting there waiting to invest in distressed opportunities, whether that's hard assets or loans. And so how much does that keep things propped up? I think there could be some benefits to it, but it also doesn't allow you to maybe buy loans and even assets at times as deep as you would imagine or as what happened through the great financial crisis and GFC. So it'll be interesting to see how this plays out. But I appreciate you certainly showing your knowledge base on that and I'm sure we could probably do a whole episode there alone. I want to flip to a last topic, which we talked before the show briefly on. One very intriguing to me because I'm very fortunate to have just come back from Puerto Rico, but I know you technically live in Puerto Rico, so why do you live in Puerto Rico and walk us through the basic elements of the benefits of living in Puerto Rico?

Jack Krupey: Yeah, just to be clear, you said I technically live in Puerto Rico. I actually live in Puerto Rico, just in case the IRS is listening.

Nate Trunfio: Yes.

Jack Krupey: I moved down there the end of 2008 and I was at a point in my life and career where I was in New York, had a very successful fund, I owned a piece of it and my K- 1 from owning a piece of the business was more than my salary. And for various reasons I just wasn't happy there. In the active employment W2 side of it, I've always been more of an entrepreneurial person and it got to the size and scale where the business had shifted and it was time for me to move on. And as I researched the tax code, there's various things. So I'll talk a lot about Puerto Rico, but I also want to highlight because not everyone can take the steps I took. One of the things I realized right off the bat was by leaving as a W2, I actually could potentially make more money because the moment I left as a W2, I didn't own a majority of the company. I owned a minority stake. The moment I left as a W2, all of a sudden my income from that K- 1 was now passive and I could offset that with the apartment buildings that I was investing in that were generating K- 1 losses on paper just from the accelerated depreciation. So really I dedicated the last year or two in New York to just researching the tax code. It's difficult, there's some good CPAs out there, but you have to live it. If a CPA starts making too much money, often they stop being a CPA and they just start being an investor themselves as well, so it's challenging. I knew a few people who'd moved to Puerto Rico back in 2014, 2015 and followed along with them. Puerto Rico has, at the time it was called Acts 20 and Act 22 and now they've changed it to Act 60. And so Puerto Rico has these incentives where if you move to the island and you run an export services business, which is essentially making money off island, but while you live on the island, they only tax you at 4%. So that's why a lot of hedge funds, a lot of private equity, a lot of consultants, a lot of internet marketing, information product type people have moved down to the island. It's incredible because Puerto Rican residents do not pay federal income tax, so it's extremely powerful. I went from paying a 50% tax rate in New York to paying a 4% tax rate in Puerto Rico. And there's one additional benefit as well. There's also no short- term or long- term capital gains in Puerto Rico. So there's a lot of stock and option traders and crypto who've moved down there because if you're day trading in the states, if you're short term capital gains is usually 50%, I mean there's some futures where it's like a 60%/ 40% split, but the taxes are significant for that industry as well. I've been there four years and while I moved because the tax benefits intrigued me, the reason I'm staying is there's an amazing community there. There's thousands of entrepreneurs who've had some level of success to make it worthwhile to move and then a sense of adventure to actually do it. There's weekly networking events where, and I'm starting to... I've been there four years, so I'm actually... The program's been around for 10, but it's really the last four or so that a lot of people have really flooded down there. I'm like one of the OGs at this point. I go to these events, I'm run into people I know and there's new people moving every week. It's amazing. It's not for everybody. If you have a W2 for a US company, it doesn't really save you any money on your W2. It really has to be for a business owner. And if you're self- employed or you are just looking for adventure, I'd certainly recommend it if it fits. I do want to point out that real estate is still taxed in the States when it's that 4% thing, that is export services. Puerto Rico's sourced income. So for the stocks, stocks, all that options are Puerto Rico sourced income. Real estate is still taxed where the properties are, so essentially you file a US tax return and you file a Puerto Rican tax return. But for me the main benefit is I don't have a normal job in the US so I have no other US income, all my income in the US is passive, so I'm able to use those tax, the K- 1 losses. So my income in the US is negligible and very similar to any real estate professional in the States who has living primarily off of rental properties. It's generally hopefully functions at close to a breakeven or carry forward in operating loss.

Nate Trunfio: Sure. Awesome man. Obviously the benefit that you implied, I mean more important just the community there, but how beautiful the island is and as you said, the people there as well. And you hit on it because I apologize, my poor choice of words. As you live in Puerto Rico, anybody would say like, " Oh, I'd love to just take advantage of this as an entrepreneur with qualifying income that can be taxed at 4%." What is the definition of living in Puerto Rico?

Jack Krupey: Sure. So there's a few different tests from the IRS and one of them is the actual days. So if you spend 183 days in Puerto Rico that meets one of the tests, but there's also a test called the Closer Connection Test. And that one is a lot more subjective. The best analogy I can use is you can't get on a plane four days a week from New York or Miami, put a foot down in Puerto Rico, fly back home and be like, " I was in Puerto Rico 183 days." If your wife, your kid, your dog are all in the States and you're the only one doing it that that's not going to pass the Closer Connection Test. So if you're going to do it, you really need to commit to do it. It's way too risky to not comply and there's so much opportunity on a personal, a social level, the lifestyle to just do it and to try to fake it just to save some money. So I'd say if it's something if you're going to do it, come down, take a couple week vacation, do some remote work and test it out. And it's not for everyone. 90% of the time, great, there's a Costco, there's Walmart. A lot of times I feel normal, but if you think going into the DMV is bad in your home state, try to get your driver's license in Puerto Rico. There's some intricacies here and there, but there's also a lot of help and there's a new service community dedicated to helping the mainland people moving down too. So there's a lot of expediters, assistance helpers that can deal with some of the government bureaucracy.

Nate Trunfio: That's awesome, man. It's like you said, it's probably not for everybody but man, after being in Puerto Rico, it's something. If your lifestyle and your family allows you to do it, it's something that to consider. And then there's auxiliary tax benefits for those that it applies. But Jackman, we've covered a lot of ground from the mainland to the Puerto Rican Islands across investing in hard assets, GP, LP, some distressed debt in there. But man, I just appreciate you dropping your knowledge and keeping it at a level that our listeners can understand too, because I know I've tapped your brain and been always impressed with the level of knowledge and the depth of it as well, man. So brother, thank you for being here and sharing on the Real Estate of Things and I know I will catch you on the other side, hopefully on the island too.

Jack Krupey: Absolutely. Really appreciate it and I'd encourage anyone to reach out. I'm sure you put some info for me in the show notes. I love nothing more than to strategize and talk through people's financial situations, help save on taxes, help move money outside of Wall Street into real estate. So I'd encourage anyone to reach out. I love to have these types of chats.

Nate Trunfio: Where do they find you, Jack?

Jack Krupey: Sure. So the website is JKAMInvestments. com. That's J- K- A- M for JK asset Management, JKAMInvestments. com. We're also on LinkedIn, Facebook, Twitter, and apparently we have a TikTok account now too. Although I haven't done a dance or anything yet, but maybe at some point.

Nate Trunfio: I'm going to have to get you to do that. And truly, you always are a go- giver with information and knowledge. I know I've even learned about how to best utilize rewards points in the numerous varieties of credit cards out there. And man, that was an impressive presentation I saw you give. And again, that's just probably one of the many, many things you talked about brother, so...

Jack Krupey: Yeah, I love that stuff. That could be an episode too. I actually, I flew in New York to Singapore in 18 and a half hours using miles. It would be a $10, 000 ticket, all for 85, 000 I think Chase Sapphire Ultimate Rewards that I moved over. So yeah, 18 and a half hours was the longest flight I've ever been on so far. Yeah, it was quite an experience.

Nate Trunfio: It doesn't sound too pleasant, but if you want some information on any of the above, please find Jack and JKAM Investments. You're always dropping knowledge and adding value and just doing good by others, man. So appreciate you and I'll catch you soon.

Jack Krupey: Thanks again for having me.

Nate Trunfio: That's a wrap. Thanks again to Jack Krupey from JKAM. This was another great episode where we covered a lot of ground on all things real estate investing. Please make sure that you subscribe and download on your favorite platforms. Every Tuesday we'll drop a new episode with great guests, just like Jack. And all things on the Real Estate of Things, you can always find it on our website, www. realestateofthings. co. We will catch you next week for some more action.


Not all partnerships are equal, but they can all create profitable investment opportunities! 

This week,  Jack Krupey, Principal at JKAM Investments, shares invaluable insights on creating partnerships in investing and expanding your portfolio. 

Discover the potential of B and C class-type units and the advantages of co-investing in syndications. Gain clarity on general vs. limited partnerships and understand the significance of preferred returns for investors. Explore the power of networking in real estate mastermind groups and the impact of bridge loans on the multi-family unit market. Stay updated on the evolving landscape of raising capital in 2023 compared to 2022. Lastly, uncover the benefits of understanding distressed debt and the financial advantages Jack enjoys by living permanently in Puerto Rico.

Join as we discuss: 

  • Identifying “lower-value” multi-family units to use to your advantage
  • General vs. limited partnerships and where you should be in each 
  • What bridge loans can mean to your investment 
  • Understanding distressed debt in 2023 compared to 2022

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