Serial entrepreneur, author, and economist, Jake Clopton of Clopton Capital, shares his comprehensive insights on managing risks, the importance of passive deals for active professionals, and the evolving landscape of commercial real estate financing amid fluctuating interest rates and market dynamics.
Jake's depth of knowledge offers valuable perspectives for both new and seasoned investors looking to navigate the complexities of real estate investment in today's economic environment. Tune in to discover how you can navigate the challenges and opportunities in the real estate market today, and so much more!
Key takeaways to listen to:
About Jake Clopton
Jake Clopton is a serial entrepreneur, author, and economist. With a focus in real estate and finance, he is actively involved in various aspects of commercial lending, insurance products, property ownership & management, and is a regular contributor to both print and broadcast media.
Current ownership and companies include:
Contributions to thought leadership include:
Connect with Jake Clopton:
To connect with Randal and learn more about passive investing, visit www.ridgelineig.com and follow our social media pages below!
Serial entrepreneur, author, and economist, Jake Clopton of Clopton Capital, shares his comprehensive insights on managing risks, the importance of passive deals for active professionals, and the evolving landscape of commercial real estate financing amid fluctuating interest rates and market dynamics.
Jake's depth of knowledge offers valuable perspectives for both new and seasoned investors looking to navigate the complexities of real estate investment in today's economic environment. Tune in to discover how you can navigate the challenges and opportunities in the real estate market today, and so much more!
Key takeaways to listen to:
About Jake Clopton
Jake Clopton is a serial entrepreneur, author, and economist. With a focus in real estate and finance, he is actively involved in various aspects of commercial lending, insurance products, property ownership & management, and is a regular contributor to both print and broadcast media.
Current ownership and companies include:
Contributions to thought leadership include:
Connect with Jake Clopton:
To connect with Randal and learn more about passive investing, visit www.ridgelineig.com and follow our social media pages below!
[00:00:00] Randal McLeaird: What's your investing background as far as actually taking the income that you're earning from your active income and then investing it, are you in passive deals or are you in buying more? Assets than the 20 unit or what does that look like for you?
[00:00:12] Jake Clopton: One of the main things that I try to do is not to have too much concentrated risk and since our entire business is based around commercial real estate, I have invested into several properties.
[00:00:20] Jake Clopton: It's just stuff that I personally own without other investors,
[00:00:23] Randal McLeaird: but
[00:00:23] Jake Clopton: they have to be passive deals. That's the issue. Cause the only way you can properly manage a property is if that's your main thing. And as somebody who works in, so I try not, I want to stay in my own lane. I don't want to run too many races and try to do.
[00:00:36] Jake Clopton: Like capital markets and also taking phone calls with clogged toilets and stuff like that, so now I mean they have to be third party managed deals.
[00:00:43] Intro: If you're a real estate agent earning 200, 000 a year and you want to grow your passive income, this show is for you. Learn secrets other agents use and hear from experts in our field who will guide you on your journey to investing in assets like apartment communities so [00:01:00] you can take your commissions and turn them into cash flow.
[00:01:03] Intro: Here's your host, Randall. Let's dive in.
[00:01:06] Randal McLeaird: All right. All right. Welcome back. It's good to have you here today. My guest is Jake Clopton. Now we're going to bring him on in just a second. He has a background in futures trading and he's a debt broker for many different types of asset classes. So we cover some of what he's been working on and what he's seeing in the market today.
[00:01:21] Randal McLeaird: He's also an owner operator of his own deals in the Chicago area. And so we talk about some of those investments that he's had. I'm a little all over the place. We cover a bunch of different topics and I'm curious about a lot of these things on myself. So I go into some detail, scratch my own itch that I can learn a little bit more about some of the things that he's working on.
[00:01:37] Randal McLeaird: But he mentioned something at the end that again, I pry into about bankruptcies and how we seeing a little bit more of that coming up in the market. And just again, asking some dumb questions at the end, but I think if you're curious as well, and if there's a type of investment strategy that you're looking for, Jake has seen it and he's put finance or debt on it for his clients.
[00:01:55] Randal McLeaird: So a wealth of knowledge shares a bunch of information. And if you want to reach out to him, all of [00:02:00] his contact information is in the show notes as well. If you're looking to finance a property or looking for LP capital, or you're looking for a joint venture, LP capital come in. He is a resource for all of those things.
[00:02:09] Randal McLeaird: Let's jump in and you can hear it from the man himself. And here we go. I'm learning more about what other people are working on, building the network and that sort of thing. So now I'm at the point where it's I got to start going out of the people shows now.
[00:02:21] Jake Clopton: What's your typical audience
[00:02:22] Randal McLeaird: real estate agents?
[00:02:23] Randal McLeaird: Yeah, this is the way you
[00:02:24] Jake Clopton: mainly like residential real estate agents or like commercial
[00:02:28] Randal McLeaird: both. Man, I've had, so me personally, I'm heavy background in fix and flip investing, single family, that sort of thing transitioned out into setting up a fund to buy commercial property and another crowd fund that we launched to do single family by fix and flip and then owner finance.
[00:02:45] Randal McLeaird: And so that's like my background and what I've been working on the multifamily fund that we have, we are just now in the early stages of it. It's just deal flow has been challenging in this. It was not the right time. I don't think to launch a fund, but maybe who knows, a
[00:02:59] Jake Clopton: lot of [00:03:00] times where people have not thought it was the right time.
[00:03:02] Jake Clopton: And then in hindsight, it was I don't know. Yeah. Same.
[00:03:07] Randal McLeaird: Yeah. Same. So that's the background. And so I've brought on a bunch of operators for multifamily, for industrial, for all kinds of different asset classes. So we've talked about that. I had a bourbon a fund on last week, we were talking about bourbon and investing alternative assets and that sort of thing and what the returns look like on that.
[00:03:24] Randal McLeaird: So
[00:03:25] Jake Clopton: wait, like investing in bottles of bourbon,
[00:03:27] Randal McLeaird: but like barrels, yeah.
[00:03:29] Jake Clopton: Oh, okay. I've heard that. Yeah, I've heard that.
[00:03:32] Randal McLeaird: It's it was an interesting strategy. I've had crypto fund managers on. Really, the whole idea is to highlight alternative assets, investments, and things that real estate agents may otherwise not invest in or know about.
[00:03:45] Randal McLeaird: Whether that's real estate, or that's crypto, or that's Anything that's going to actually build their cashflow. So I want to talk about commercial myself. I had a small multi enter contract. Just had to back out of it because the debt in the property just didn't, it didn't make sense. And so I'm looking [00:04:00] at land.
[00:04:00] Randal McLeaird: I'm looking at contractor garages. Like I just rented this place for my rehab company. Oh, and I'm looking at building things like this, I have a garage next door. It's a little warehouse. So financing for these types of projects, either ground up or purchase, we could talk something like that.
[00:04:16] Randal McLeaird: Again, it's scratching my own itch here a little bit too much, but it's like you're in the space, man. And then talking really about, what you're doing. So it's good to have you on. All right. So I wanted to talk first, I was reading the Ford of your book, and this is a topic that I was in a mastermind talking about funds and setting up funds and what investors are looking for right now.
[00:04:34] Randal McLeaird: And you said something in the Florida, your book that was. We're entering into a low yield environment and we have been for some time because of certain economic factors that have happened over time. So with your unique perspective on the debt side of things, what trends are you seeing that are emerging as winning investment strategies that individual investors or sub family office.
[00:04:53] Randal McLeaird: investors are actually employing right now.
[00:04:56] Jake Clopton: So the book I wrote when rates were coming down,
[00:04:59] Randal McLeaird: okay, [00:05:00]
[00:05:00] Jake Clopton: we're actually unwinding that low yield environment now for sure. As we sit right now, I think, a lot of family office investors and people are looking to invest into funds are, they're looking for more meat on the bone than they were previously and the risk averse, right?
[00:05:16] Jake Clopton: So when they're going to like, so we do a lot of like LP equity arrangements also. And One of the major themes that, equity funds turn to when rates started rising is they did a risk off strategy of moving from like LP, common equity, to PREF equity.
[00:05:34] Jake Clopton: And that PREF equity space is basically giving them like first priority in cash flows.
[00:05:39] Jake Clopton: It gives them a little bit less return, but it gives them more security than just investing into just, common equity. So that was one of the major themes that we saw coming out of family offices once rates started rising, and the other is just looking for a lot higher IRRs and yield on costs and deals and being much pickier.
[00:05:58] Jake Clopton: There's a lot [00:06:00] more deals going around than there is investor equity right now, it seems. Those investors are able to be a lot pickier than they were in the past.
[00:06:08] Randal McLeaird: That's interesting because I thought it was the opposite. I thought it was, there's a lot of money sitting on the sidelines ready to be deployed, but not enough deal flow for that money to go into that are providing the returns.
[00:06:18] Randal McLeaird: So is it specifically? There's a lot of
[00:06:20] Jake Clopton: money sitting on the sidelines, but it's From what I'm seeing, it's doing just that it's sitting on the sidelines. And the money that is willing to be in the market is much pickier. I am seeing a lot of equity funds that are like still, saying, Hey, send us deals, let us look at stuff, but they're not executing on anything.
[00:06:39] Jake Clopton: That's some of the biggest difference is, a lot of these guys really hit pause for a long time. Right now I'm seeing a lot more of them start to really take serious looks at things. So I think, the basis and The deals I'm seeing out in the market, either prices are starting to come down and that's some of that too, but the, some of the underlying economics of these properties are starting to, come up as well.
[00:06:57] Jake Clopton: And, some of the lending side has alleviated a [00:07:00] little bit on the cost of capital. So more deals are coming together. I'm starting to see more acquisitions and people chasing them. Equity's still a little. A little nervous and definitely wanting higher returns. A lot of the stuff that I'm seeing get capitalized in the market is some like special use properties, right?
[00:07:18] Jake Clopton: So we're doing for instance, lots of storage. Seeing a lot of equity chasing storage deals and the kind of alternative asset classes like car washes and stuff like that. The yield on cost and building like a multifamily property right now is still pretty low on average from what I've seen. And a lot of those, it's just hard to pencil if you're an equity player.
[00:07:36] Randal McLeaird: Yeah. So working with LPs in order to come into the pref equity side, are any of them concerned that, again, I've seen a lot of bailouts from pref equity on multifamily deals specifically because that's been the thing that I've been most focused on? Yeah. And I wonder if it's good money chasing after bad, or is it, they're positioned in a way where they have governance on the deal so they can come take it over if they have to.
[00:07:58] Randal McLeaird: And they're going to, they're willing to inject the [00:08:00] extra equity if needed to save a deal.
[00:08:02] Jake Clopton: I think a lot of what I'm saying is the latter, right? The funny thing with a lot of these properties, there's really, if you look at some of these distress properties or, the ones that are in trouble, there's really nothing wrong with the property itself.
[00:08:13] Jake Clopton: A lot of these ones that I see need rescue capital, like they're, 95 percent occupied and performing and fine. It was just, the assumptions of when they went in, didn't exactly pan out and they just took on too much leverage, for when rates went up, so if you were planning on, a certain amount of rent growth and you took on 85 percent LTC debt with some value add deal and you needed a 4 percent rate to take you out, And all that rent growth, it just didn't happen.
[00:08:39] Jake Clopton: There's no margin for error. I am working on several of those right now, right? So when a lot of these like CLO bridge loans, are coming due, let's say they had 15 million bucks worth of debt on it for bridge debt. And, the exit was going to be an agency loan, and now because of where rates are and maybe the rent growth didn't pan out, that agency loan, they only get to 12 million bucks.
[00:08:58] Jake Clopton: So you've got that gap. [00:09:00] That's where we're seeing, a lot of prep equity guys step in. I'm not going to say whether or not their prints are in it, but they are in a secure position and they're at a good basis. Where if they had to step in, they certainly could, and I think they would be in at a decent basis, but all of that equity above them is still at risk for sure.
[00:09:17] Jake Clopton: Yeah.
[00:09:17] Randal McLeaird: That's one thing that I've noticed. I'm on a number of deals and one of them is in that position and we're like, okay, is that, are they going to what's going to happen here? So I was just curious on your take on what you're seeing and how those things are being worked out on the back end, because that's been a conversation around a lot of, yeah. A lot of
[00:09:33] Jake Clopton: these deals, man, it is what it is, right? Because so most of the deals I'm saying that are getting rescue capital come in, like the only alternative would be just to sell the property. And a lot of times that works out to the equity being completely wiped out. So they might as well, mortgage their future a little bit and get some prep equity and see if they can sell it.
[00:09:52] Jake Clopton: Five years and at least get their, their original equity that went in back. That's what I'm seeing in a lot of deals. It's more capital preservation than still trying to make a [00:10:00] return.
[00:10:00] Randal McLeaird: Okay. And so when you're putting those together, what kind of returns are the pref guys looking for, or what are they offering?
[00:10:06] Randal McLeaird: I guess the LP side.
[00:10:08] Jake Clopton: Yeah. I'm seeing prep, priced. Double digits up to 14%, 11 to 14, somewhere in there. That's really average. A lot of the prep we're doing is like single digit, million dollar prep deals, like one to 5 million. That's really where I'm seeing your price, but the prep itself is structured as like a current pay and like an accrual.
[00:10:26] Jake Clopton: So a lot of days they'll have the require a seven current pay and the rest of it just occurs or accruals. Yeah. And then it's paid off.
[00:10:33] Randal McLeaird: Okay. Okay. That makes sense. And you said you're seeing more deal flow. So again, is there a specific asset class you mentioned storage brother does storage.
[00:10:41] Randal McLeaird: I've talked to him about storage quite a bit. And I know some of the guys that are doing a lot of that and they have challenges as well, right? There's apparently some lawsuit that's coming out. That's going to affect their dynamic rent pricing. I don't know if you've heard about this or not. But I was curious if, I heard this on another podcast, so it may not be a hundred percent accurate, but A.
[00:10:57] Randal McLeaird: J. Osborne's the guy that does a ton of content [00:11:00] for storage and they talked about it and how some of the big operators are coming under fire essentially for getting people in at a dollar, and then jacking it up and then jacking it up and then jacking it because it's one month rent terms.
[00:11:11] Randal McLeaird: That
[00:11:12] Jake Clopton: makes sense,
[00:11:13] Randal McLeaird: but again, I don't want to harp on that, but just curious. So you're seeing that a lot of capital is flowing into those deals and the returns are still there. There's no real issues with oversaturation in that asset class that you're seeing right now.
[00:11:24] Jake Clopton: I think what I'm seeing in the storage space is there's a market in like the smaller storage facility space in more like secondary tertiary markets where some of those are still very undersupplied.
[00:11:37] Jake Clopton: Yeah.
[00:11:38] Randal McLeaird: Yeah.
[00:11:38] Jake Clopton: And, or. There's like mom and pop facilities that people are aggregating. So a lot of what I'm seeing is, these kind of like small to middle market storage companies coming online that have the intention of, going in and adding new supply through construction and underserved markets and, or taking over, like legacy properties that are just mismanaged or.
[00:11:56] Jake Clopton: Like the guy's just old and retired. I'm doing a lot of deals with the guys from [00:12:00] Emporia, so that is a big space in storage. Some of the larger facilities, when you get up to the public's and the extra space. That space, depending on where you are probably is getting a little saturated.
[00:12:12] Jake Clopton: Like I did see an extra deal where a public came in right across the street, cut rents and the extra deal got correct,
[00:12:19] Randal McLeaird: but
[00:12:20] Jake Clopton: so I am seeing more competition on that side with the larger companies like that. And some of the larger facilities for sure. But, in this like small space there, I think there's still room to run a bit and aggregate some of those portfolios.
[00:12:32] Jake Clopton: We'll see how much longer that goes, right? I've been doing this for 15 years. So I've seen this movie like a whole bunch of times. Yeah, I've seen that movie several times and they probably got another 18, 24 months to run before, a lot of that's eaten up.
[00:12:44] Randal McLeaird: Yeah. Got it. Okay. And then you mentioned one other thing before we move on car washes, right?
[00:12:48] Randal McLeaird: So I was, around San Antonio I'm here and they have been blowing up the drive thru, the tunnel is back, right? And then the free vacuum and all of that, they're all over the place now, they're going crazy. I [00:13:00] think a lot of PE firms went in and just financed some of that stuff. Maybe not, but it's a I've washed my car more times since having that, that 30 membership a month.
[00:13:08] Randal McLeaird: And so I see the value in it and they're going up all over the place. I was literally looking at franchise models for that to put one up where there's not one here in San Antonio. So I want to talk about financing and what that looks like, because if you're doing that type of financing, it's not something I've ever even looked into.
[00:13:22] Randal McLeaird: It's just. I see them, I've used them personally and I'm like, okay, this is great. I love these. They're much easier, better, faster than me getting out scrubbing my car with the traditional coin operated car washes. So what does that look like when you're going through and financing something like that?
[00:13:37] Randal McLeaird: Now, what kind of debt can you put on those things? And then just what are the returns that you are seeing? Again, I imagine you get to see the return profile on some of these deals, not just the finance side. You're actually seeing the business plan and some of the things they're going through. So yeah, let's talk car washes for a second.
[00:13:51] Jake Clopton: Sure. So in any deal where I try to figure out like what kind of like dad is the most efficient, really start with the equity stack and go from there. Your lowest [00:14:00] cost capital is always going to be banks and credit unions, stuff like that. But if you, let's say you're doing like a GPLP syndication, like that's going to be really hard to do after maybe the first couple of deals.
[00:14:10] Jake Clopton: But also most of the time, the GP is just not willing to sign on a hundred percent of the debt if they're only taking, 10 to 20 percent of the deal.
[00:14:16] Randal McLeaird: Yeah.
[00:14:17] Jake Clopton: There's certainly private money out there for pretty much all this stuff, as well as, bank, credit and debt talk about the two separately.
[00:14:25] Jake Clopton: Private money there's a lot of, a lot of debt funds out there. You got to be careful in that space sometimes because a lot of debt funds aren't. There's aren't even really direct lenders themselves. There's some that are, that do like these AB, structures and they have line lenders and you have to be cognizant of that because they need extra approvals.
[00:14:42] Jake Clopton: And then there's other guys that just had the money sitting there. So I think when you're dealing with private lenders, it's it's not very transparent. It's not like dealing with a bank where you know how they're capitalized. So one of the things I would tell people is be careful of like their approval process and where their money comes from, because.
[00:14:55] Jake Clopton: It may be very different than you actually are assuming when you go in, just the [00:15:00] general theme, with debt funds and especially like special use properties is, a little bit lower leverage and probably the average rate I'm seeing from debt funds. Especially for construction and stuff like this is, double digits,
[00:15:10] Jake Clopton: For sure.
[00:15:10] Jake Clopton: Prime is still, in the eights with a debt fund is certainly going to be in the double digits. Some are still requiring PGs, others, can let you get away with just a completion guarantee. Which you're still it's still a personal guarantee though, guaranteeing it gets built.
[00:15:22] Jake Clopton: Yeah. Once it gets built, then that kind of goes away. Banks and credit unions are a really interesting space right now. I would say, maybe three quarters of what we do goes through conventional lending like that. It's just, with all the bank stuff that's going on, it's just a completely different environment than it was two years ago, right?
[00:15:43] Jake Clopton: Two years ago, these banks had so much liquidity, they didn't know what to do with themselves, and they were tripping over themselves to put out money and, to lend. There's really three types of banks out there, okay? There's ones that are still pretty capitalized, and they've got money to lend.
[00:15:56] Jake Clopton: There are. There's ones that don't really have it and they want [00:16:00] large deposit relationships to lend. Like for instance I got one long quote from a bank where I think they're going to lend 10 million bucks, but they wanted 30 percent in compensating deposits to lend to me. And I'm like,
[00:16:11] Randal McLeaird: yeah,
[00:16:12] Jake Clopton: what are you talking about?
[00:16:13] Jake Clopton: Like why even? Like, why are we even doing this? Yeah. And then candidly, there's others that really aren't lending at all. They haven't really come out and say Hey, we're not lending, but they're just really not the issue with dealing with those types of lenders. Is you don't really know which one they are until you get in and do it and really go through their process and drill into what they need.
[00:16:32] Jake Clopton: And so like on any one deal, for instance, when we're arranging like bank or private debt fund financing, we may talk to, 150 different lenders in this space. To really wrap in everybody and, figure out like, Hey, is this somebody that's actually going to get an approval and is, are they going to require huge deposits and stuff like that?
[00:16:48] Jake Clopton: There's, as far as like both sides, there's certain liquidity on both sides. It's just, some of it comes from more strings attached on me side. And then. You have to really be cognizant of the approval process because, on both [00:17:00] sides, there's risks, right? There's risks with banks where, they have, some of them have this three tiered approval process.
[00:17:04] Jake Clopton: And then again, on the private lending side, you got to understand if that's really in house approval or if they have to go out and, get it from somebody else.
[00:17:11] Randal McLeaird: Yeah. Yeah. You just mentioned, right? Talking to 150 banks. All right. I got to ask then. So what does your operation look like?
[00:17:16] Randal McLeaird: Just Is it you and you're on the phone? You got 20 people like, what does it take to be able to do that?
[00:17:22] Jake Clopton: So yeah, I can go into our firm as a whole is we're really a commercial real estate service firm. So like I run all of our capital markets, then we're also actually an in house commercial property insurance company.
[00:17:33] Jake Clopton: We're a 1031 qualified intermediary. We do some commercial solar installation and financial modeling. I don't run any of the other sides, like other guys had those up. As far as our capital markets, it's a pretty efficient process not to go into, too much to give away what we do, there's a lot of people supporting me on my side.
[00:17:50] Jake Clopton: So yeah, but you're not wrong. It is a lot of work to talk to that many bankers. A lot of the conversations, can be short hey, not for us, but we will end up having, thoughtful [00:18:00] conversations with, out of 150, probably 20 to 30 bankers to try to figure out if it's something that actually works, once you get past some of the guys that just aren't a fit or just need to pass or whatever reason.
[00:18:08] Randal McLeaird: So having gone through this process myself using. Debt broker loan assistant. I don't know. He called himself something special in this most recent deal. I'll tell you I'll tell you offline here. I found that the process was not as transparent as I would have hoped, right? If I were dealing directly with the bank or talking directly and getting the real story, right?
[00:18:27] Randal McLeaird: We need X, Y, and Z, or hey, this thing is not going to really work out the way. So what do you do in your operation that allows for that transparency when you're working with a client dealing with 25 different lenders? When you lock it in, are there anything specific and special that you guys do that if I'm working with somebody locally, I can expect the same thing?
[00:18:44] Jake Clopton: Once we get terms and, let's say we get terms, a term sheet are out. It is out, right? Our process is we try to get everybody connected and really like direct communication going, right? Because, once we're through there, like you're going to be dealing with this lender [00:19:00] for the next five or 10 years, maybe, right?
[00:19:02] Jake Clopton: There's a relationship that needs to be built there. I usually do coach people a little bit once we're going through the loan process about Hey, what to say, what not to say, basically not say, more than you need to. I've had. Borrowers, of course, over 15 years, I've had borrowers get on the line and just say something that didn't make any sense and have the guy go, okay, thanks.
[00:19:20] Jake Clopton: This is dead.
[00:19:20] Randal McLeaird: Yeah.
[00:19:22] Jake Clopton: Like for instance, I think one time we had a borrower say, Hey, just so you guys know, I'm working with six other banks at the same time and whoever gets there first gets a loan. You got to realize the people you're working, that you're working with are also wanting to make sure that their time goes somewhere.
[00:19:35] Jake Clopton: So those types of aspects. But generally speaking, in my philosophy here is really be a hundred percent transparent. The last thing you want. is something to come out, once you're in the loan process that should have been brought out upfront and then that's going to kill it, right?
[00:19:49] Jake Clopton: What I've noticed throughout the years is you can handle just about anything upfront, right? You can talk it through other stuff, but when it comes out during the loan process, it looks more like you're hiding it or you just, maybe there was just some [00:20:00] inexperience on that side, knowing it should have come out.
[00:20:01] Jake Clopton: And that does derail things. But no, generally speaking, we want to be as transparent and open as soon as possible. And especially when we're dealing with, sensitive documentation, like tax returns and stuff like that, try to not be an intermediary in that regard and have that stuff sent, directly to where it needs to go.
[00:20:17] Jake Clopton: Because The more times it hits, the internet, the riskier it gets and somebody intercepting it.
[00:20:21] Randal McLeaird: Yeah. Yeah. Okay. All right. Let's move on. I want to talk, you wrote the book commercial real estate investing, understanding, finding and funding deals in today's world. I know you. So
[00:20:32] Jake Clopton: I
[00:20:34] Randal McLeaird: want to go through and just use it as an outline that we can talk about some of the topics in here.
[00:20:40] Randal McLeaird: So commercial markets and sub markets, I think that's just going to describe the different types, right? Primary, secondary, tertiary, right? Is that? Yeah. Okay. So we don't need to dive into that. But in here you say ways to source off market and on market deals. So let's touch on that right now for today's environment.
[00:20:55] Randal McLeaird: What are you seeing work for finding deals off market? Is [00:21:00] it specific marketing strategies you talk about in the book or is it something else that you guys are, or that you work on?
[00:21:06] Jake Clopton: Yeah, no, good question. So for instance, we can actually be a good source for off market deals, right? I'm in the market all day long, we're constantly talking to people.
[00:21:13] Jake Clopton: And we're constantly talking about their financing. And, generally speaking finding an off market deal a lot of times is If you're not doing like a large marketing operations, it's a lot of chance, right? It's a networking and knowing the right people. There's certain ways to look at stuff and know Hey, maybe a loan's coming due and this would be, when they're going to be selling or, finding, again, like somebody that, was just coming off construction loan or, like an equity investor.
[00:21:38] Jake Clopton: I don't think there's one silver bullet.
[00:21:40] Randal McLeaird: Sure.
[00:21:41] Jake Clopton: Cause there's all different ways to find, and in Canada, there's all different ways that like this stuff comes to us too. Canada, like brokers can be a good source for off market deals too, which sounds weird enough. I think if you're looking, if you have a certain buy box criteria, just going out there and putting it out there to, as many people as you can, that has been.
[00:21:59] Jake Clopton: A good resource for [00:22:00] us to help people find off market deals. We're not a real estate brokerage, right? Sometimes we help acquisition people find deals and we can help finance or do insurance for, and we've had a lot of success. Just reaching out to our network and saying getting a buy box from a guy, Hey, we're looking for, properties with 200 doors, they, between X dollars in this area and sending that out to, our list of broker contacts and all of our clients and have come back with stuff.
[00:22:24] Jake Clopton: If you don't have that type of network that you can reach out to and kind of source from, there's. You're really at the mercy of data, right? Then you've got to go look, start looking at title data and figuring out like. A certain criteria of again, loans coming due is a great one or just, papering, people in some way.
[00:22:41] Jake Clopton: It's definitely a grind one way or another, but I see guys find these all different kinds of ways.
[00:22:45] Randal McLeaird: Yeah, for sure. For sure. I was going to say for the loan data, what would be a top source that somebody that is Hey, I want to go find this data. Where can I find it either paid or free?
[00:22:54] Jake Clopton: It depends on what type of properties you're after, right? Reonomy, CoStar, like all these [00:23:00] places, TREP is a good way to find loans that are coming due. Some of these things are pretty expensive if you go that way. I think the best way to do this is to find a source that'll give you cheap title data leads.
[00:23:10] Jake Clopton: And then, there's also no silver bullet here, right? Cause there's no, I don't think there's a source that just sells like the leads plus all the stuff you want, plus their contact information at a certain point, you're going to be hiring somebody in Pakistan or something to do title research for you, but keeping it cheap and doing that, I think is the best way.
[00:23:28] Jake Clopton: Finding like a source that sells like cheap title data and then using, yeah, again an Upwork or something like that to to get a research is I think the best way to go.
[00:23:37] Randal McLeaird: Yeah. Yeah. It's just thinking about building the top of the funnel. So if you're trying to get into this sort of thing, I don't know, go back to single family, the way we market, it was, so many different lead sources, but you got to build the funnel.
[00:23:48] Randal McLeaird: So I'm just trying to think and. Outline some of those items for anybody that's listening that may want to be jumping into it. Yeah, and single family.
[00:23:57] Jake Clopton: Yeah, single family is a difficult one, right? Because it's a [00:24:00] mass marketing effort. And you've got to spend a lot of money for a lead.
[00:24:04] Randal McLeaird: Yeah. The I was talking to a buddy yesterday and he has transitioned everything away from what we used to do.
[00:24:10] Randal McLeaird: It's just like mass market, maybe. 50, 60, 000 a month and just postcards, right? Oh yeah. A ton of postcards going out and he is only PPC, but nationwide and he's doing all virtually. And he was telling me this whole thing of how he's buying his properties now and spending very little money on doing it.
[00:24:25] Randal McLeaird: But on the commercial side, again, it's like, where's this data coming from? And so Trek was the one you mentioned, that's fairly expensive to sign up. And some of these things can get very expensive. So yeah, it's a good tips that you just gave to get this time. Yeah.
[00:24:36] Jake Clopton: Believe me, I have been I've been trying to keep our data source costs as low as possible for 15 years.
[00:24:42] Jake Clopton: So I believe we're all fighting the same fight when it comes to
[00:24:45] Randal McLeaird: and then obviously on market, you could look those up on a number of websites, LoopNet, Crixi, all those things that, talk to brokers directly. So I wanted to talk about some of CRE's key performance indicators.
[00:24:56] Randal McLeaird: There's another topic you cover in the book. So let's talk [00:25:00] specifically multifamily. Multifamily. So if somebody's looking to invest in multifamily, maybe 25 to a hundred unit deal, right? Looking in, in secondary markets or something like that. What types of indicators would you recommend they look at when going to buy something like that?
[00:25:15] Jake Clopton: Like as far as like cap rate and
[00:25:17] Randal McLeaird: maybe like population, income, demographics, anything like that. Are those the things that you're looking at if you're looking at buying? Cause I know you've bought multifamily in the past, right? Are you still buying? Where are you? No,
[00:25:27] Jake Clopton: We own in Chicago right now.
[00:25:29] Jake Clopton: If there was something compelling that came up, maybe, the issue with buying a lot of this stuff today is you get negative leverage, right? Like the rate on your loan is higher than the actual cap rate you're getting. And so until that, adjust.
[00:25:40] Jake Clopton: We'll see. Chicago's a difficult market though, just all the way around. It's not just, okay, so when I'm looking at properties today, there's, cap rate is really difficult to really get a good picture of what it is. Yeah. Because also it's not just the income side. That I think is the part that needs to come up, but the expense side of a lot of [00:26:00] these properties.
[00:26:00] Jake Clopton: Is really getting out of hand, especially like insurance costs, utility costs, stuff like that. Yeah, again, we're an insurance company and just this morning, I was talking to a guy saying, Hey man, my insurance just tripled that basically just ate up all of my NOI. Like I, there's nothing I can do.
[00:26:16] Jake Clopton: How do you. Your loan requires you have insurance, especially if you're in a market, like Florida or Texas, something like that with a lot of wind, those insurance policies are getting crazy.
[00:26:26] Randal McLeaird: So explain to me why being on the insurance side, why is it going up so much, not just the natural disasters that have happened and that sort of thing.
[00:26:33] Randal McLeaird: So reinsurance market, I don't understand how that works. So
[00:26:37] Jake Clopton: I'll do my best to explain how it's been explained to me. A lot of the insurance risk was just mispriced apparently in the reinsurance market, because of all the new, natural disasters and stuff like that. And I'm not really going to get a debate in like global warming and all this stuff, but there's more natural disasters.
[00:26:52] Jake Clopton: And the thing about insurance is, when you get more insurance loss, it gets spread out over the whole market. You don't just say [00:27:00] Oh, that guy's house got flooded. His insurance is going to go up the way the insurance companies. It sure is. They spread the risk out of across the entire portfolio, right?
[00:27:08] Jake Clopton: As certain markets are seeing, they're getting more losses. They didn't have to spread that out over everybody. Okay. There's three things of what I commonly see in the insurance market. Insurance rates are just going up because of this, more losses and the kind of the mispriced risk in the reinsurance market and what that's translating to, for people is higher premiums and then some insurance carriers are just flat out leaving markets.
[00:27:29] Jake Clopton: Like we've seen, a lot of insurers were like, Hey, we're not even going to be in Florida anymore. So the supply side of insurance policies is getting. Smaller too, right? So that's affecting as well. The other thing that I really consistently see, and this is less of an insurance, reinsurance thing, but more something on like the retail side is, we see people get stung with policies and not able to market them because they think, oh I've renewal coming up and they don't get with their renewal price.
[00:27:57] Jake Clopton: Until five days before the renewal [00:28:00] and lo and behold, it just doubled. They're not going to find a policy in five days. So they have a choice. They can either take this, doubling, twice as expensive policy, or they can go without insurance for a while and maybe put their loan into default.
[00:28:11] Jake Clopton: It is what it is. So yeah, so I'm telling people like we've been able to cut a lot of insurance policies and have just by going out there and marketing the policy and in the appropriate amount of time. So if you've got some is coming up, definitely, get on that and don't wait for the renewal.
[00:28:25] Jake Clopton: Okay. So we got to track those. So indicators for tertiary markets. I think the biggest thing that I look at in any market is what are the underlying economics look like, right? And especially when you're talking about multifamily and pretty much it's,
[00:28:37] Randal McLeaird: Yeah,
[00:28:38] Jake Clopton: it's what is the demographic, trends look like in the area?
[00:28:41] Jake Clopton: It's pretty easy to tell when you're looking at like a tertiary market, right? So for instance, there's a lot of tertiary markets around here where you might find like, I don't know, a nine cap supposedly on a multifamily property, but there's a ton of population outflow.
[00:28:54] Randal McLeaird: Yeah.
[00:28:55] Jake Clopton: That would definitely be a red flag.
[00:28:57] Jake Clopton: Usually the areas, the properties that I see [00:29:00] well do over the long term are ones where there's positive economic growth, like job growth, salary growth, and like positive population growth, which makes sense, which is why everybody's looking at, Sunbelt State stuff like that. You've seen so much property appreciation in Florida and Texas, places like that.
[00:29:14] Randal McLeaird: Yeah.
[00:29:14] Jake Clopton: Like for instance, in Chicago where there's not a lot of population growth and arguably outgrowth, there's property values around here have been stagnant for a while. And then, without growth, you get a lot of other things, right? Like higher property tax and stuff like that, because, municipalities need to get revenue from somewhere.
[00:29:30] Jake Clopton: So we, we see a lot of like expense side increase as well.
[00:29:33] Randal McLeaird: Yeah. So are you buying, are you looking for anything? I know you said you're on hold right now, but are you.
[00:29:39] Jake Clopton: I'm selling a property and then we're going to have to 1031. So see what that looks like.
[00:29:44] Randal McLeaird: Can you intermediary your own money?
[00:29:47] Randal McLeaird: You have to use out, can you, or can you.
[00:29:50] Jake Clopton: No so
[00:29:51] Randal McLeaird: maybe it's,
[00:29:52] Jake Clopton: yeah, we can use our own, I don't know. That's a good question. We haven't gotten to that yet, but
[00:29:57] Randal McLeaird: anyway, yeah, sorry.
[00:29:58] Jake Clopton: Probably [00:30:00] not.
[00:30:00] Randal McLeaird: So what are you selling and then what are you looking to move into anything that, that is higher, better and more cashflow or what are you looking for?
[00:30:09] Jake Clopton: We're selling a a 20 unit in Chicago. And yeah, we're going to try to find, the right property. I, we'll get a decent amount of time after the sale. I think this year is probably the inflection point of, where it's going to make sense to, start buying. I think, the underlying economics generally speaking are strong, right?
[00:30:28] Jake Clopton: There's still been job growth every single quarter despite higher rates. And now we're talking about rates coming down. As far as. Like the lending market we've got a great handle that there is liquidity out there. There's not a credit crisis and, things are strong. So I'm starting to see, property owners, be more open to taking lower prices and more stuff coming in line.
[00:30:48] Jake Clopton: So I think we'll probably stick with the same asset type, just maybe not in Chicago.
[00:30:54] Randal McLeaird: Okay. Yeah. What markets?
[00:30:57] Jake Clopton: I got to sell this property first. I [00:31:00] think the areas that I'd want to be in are probably. Okay. Some of the more expensive ones like Miami or something like that.
[00:31:05] Randal McLeaird: It's
[00:31:08] Jake Clopton: To try to be able to touch, something that we're acquiring.
[00:31:10] Jake Clopton: Are you going into Miami? Yeah. We do a lot of deals down there. Really? Okay. Yeah. Pretty close. It's like down there a couple of times a year.
[00:31:17] Randal McLeaird: Yeah. Okay. So you're looking at those deals is that 20 unit, like the main property that you like, what's your investing background as far as actually taking the income that you're earning from your active income and then investing it?
[00:31:29] Randal McLeaird: Are you in passive deals? Are you in? Buying more assets than the 20 unit or what does that look like for you?
[00:31:36] Jake Clopton: As far as Investing in a property. So one of the main things that I try to do is not to have too much concentrated risk. And since our entire business is based around commercial real estate, I have invested into several properties.
[00:31:48] Jake Clopton: It's just stuff that I personally own without other investors,
[00:31:51] Randal McLeaird: but
[00:31:51] Jake Clopton: they have to be passive deals. That's the issue. Cause the only way you can properly manage the property is if that's your, Main thing. And as somebody who works on, so I try not, [00:32:00] I want to stay in my own lane. I don't want to run too many races and try to do like capital markets and also taking phone calls with clogged toilets and stuff like that, so now, they have to be third party managed deals. We own a couple of buildings or Chicago. What type of what's up? Yeah. Just multi family.
[00:32:16] Jake Clopton: Yeah.
[00:32:16] Randal McLeaird: Yeah.
[00:32:17] Jake Clopton: But I am also careful to not. Be too concentrated, definitely learn my lesson during COVID because I know everybody got affected, but especially like real estate came to a halt. And then on top of that, there was the issues with, collecting rents and all of that. So a lot of concentrated risk in one area just makes solving any of that stuff difficult.
[00:32:38] Randal McLeaird: Yeah, I got that. Yeah. With the rents. So are you looking for other asset classes going forward or other investment strategies going forward?
[00:32:46] Jake Clopton: I think what we probably want to do is less like. Let's like direct, I would say investment and probably find more like an LP position or something to invest in, something more like that, along those [00:33:00] lines, just because of our main business, more than enough good operators and maybe diversify the asset class storage.
[00:33:05] Jake Clopton: Again, that's something I'm looking at, but it'd have to be somebody that can handle a tech structure, but I think we'll find it.
[00:33:11] Randal McLeaird: Yeah. Yeah. What, 10 31 out. Is that why you want the tech structure or you just want it?
[00:33:14] Jake Clopton: Yeah, it's got to be.
[00:33:19] Randal McLeaird: I guess going forward, I want to see what you're seeing. You mentioned that this year, you think is the inflection point. So rates didn't drop, right? Do you think we're going to get some rate drops this year? I know it's your crystal ball.
[00:33:31] Jake Clopton: So the Fed meetings yesterday, right? And so they've been telegraphing this, like three easings, which is probably a quarter point each. I don't see any reason why they need to get ahead of themselves, to drop rates, inflation is still high and the higher rates just don't seem to be stopping job growth whatsoever. I would tell you one of the major things that I do see, in private businesses is I get a lot of calls for dip financing, which is debtor in possession financing for like bankruptcies.
[00:33:57] Jake Clopton: And I've gotten a lot more of those, [00:34:00] like a lot
[00:34:00] Randal McLeaird: more. So what does that tell you? And where's the opportunity there for someone Investing is, or is there one, is that,
[00:34:10] Jake Clopton: yeah, generally speaking, I think, the fed wanted to raise rates to slow down the economy and they usually do that until something starts breaking.
[00:34:18] Jake Clopton: And, if I'm starting to see a lot more bankruptcies and stuff like that, it starts to show that, it is causing pain and things are slowing down a little bit and just maybe, the major economy is not really able to see it yet. It's really easy to see when a public company goes out of business, but it's almost impossible to know when a private company goes out of business, right?
[00:34:36] Jake Clopton: And most of I think most of the economy is built around just, small businesses. So we are seeing a lot more of those, and then, seeing like the real estate market kind of loosen up. I don't know if you saw this print today, but home sales jumped almost 10 percent this month.
[00:34:48] Randal McLeaird: No, I didn't. I didn't see that.
[00:34:51] Jake Clopton: Yeah. So it's interesting. I think a lot of the, a lot of the forces are going in the direction of where you need them to be to get more comfortable with getting back in.
[00:34:58] Randal McLeaird: Yeah. Yeah. All right. I got to ask you [00:35:00] then again on the dip side, if I saw a business or if you had this, I guess insight and it was a car wash or it was a laundromat or it was some kind of small business that actually was something that I would want to invest in, like, how would I.
[00:35:12] Randal McLeaird: Or is there a way for an investor to go in and either acquire those businesses through bankruptcy? Or is that possible? I'm ignorant to this, so I'm asking.
[00:35:21] Jake Clopton: Yeah the thing is, once they're in bankruptcy, they're under that protection. Yes. And they may be in that for a long time. A lot of their assets are going to be tied up in the bankruptcy, if not all of them.
[00:35:33] Jake Clopton: There's ways for, it's what debt financing is, right? A lot, it's outside financing that'll, comes in during a bankruptcy to allow the business to continue as a going concern, basically. But there are ways to get involved. You would just have to be extremely careful about.
[00:35:46] Jake Clopton: You can always put in offers, to buy some of the assets, the bankers, of course, got to agree to it. But of course, these are all, opportunities, but, a lot of times these companies that enter bankruptcy, man, they get locked up for a long time. A lot of the fire sales, I [00:36:00] think, maybe you're thinking about that happens in lieu of the bankruptcy.
[00:36:03] Jake Clopton: I get it.
[00:36:03] Randal McLeaird: Okay. Yeah, I just, again, not, I've never even thought of looking in that as a, as an opportunity and you just mentioned it was like, wait a second, hang on, is that something that
[00:36:14] Jake Clopton: there's something there. Every one of those things is different. Everyone's things is very different. There's definitely something there.
[00:36:19] Jake Clopton: I don't know if there's a way to get down on bankruptcies. It probably is.
[00:36:22] Randal McLeaird: Yeah. That's what I was like, is it only coming to lenders like yourself or is that through an attorney or, somebody who's got that information somehow, maybe in a public Paper.
[00:36:32] Jake Clopton: It's a good question. I'm sure an attorney could figure it out.
[00:36:34] Jake Clopton: We get it because, candidly it's on our website and people find it.
[00:36:38] Randal McLeaird: Yeah. Yeah. Got it. Okay. All right. Any parting words, any advice for anyone jumping into investing, any agents looking to turn their commissions into cashflow for the coming year? What are your last thoughts here?
[00:36:49] Jake Clopton: Yeah.
[00:36:50] Jake Clopton: As far as agents, I think. I think people are out here looking for deals. They really are. I've talked to a lot of agents and some of them were, like, pessimistic and had given up, but I, from [00:37:00] what I'm seeing, there's a, I would say for every, about every other client I have, there's the guy sitting on an enormous amount of cash.
[00:37:07] Jake Clopton: I know at least six, seven groups that are sitting on, private guys are sitting on ten plus million bucks, looking for deals. And they can't find any. So if you've got the marketing engine and you can, pound the pavement and find deals, there's guys with money that are up here to buy them.
[00:37:22] Randal McLeaird: Yeah, that's awesome. And you actually work as a liaison essentially with some of that. If somebody has a deal and they wanted to reach out to you and said, Hey, I got a deal, but I need some private capital. That is your, that's your area of expertise, correct? That's all we do, man. Right on. Okay. Look, I'm going to put all your contact info in the show notes.
[00:37:40] Randal McLeaird: Jake's been awesome catching up with you, learning what you're working on. If you are looking for finance or you're looking for some LP, it sounds like you do some of the LP You put that together. What do you call that anyway, where you're going out and raising the you're putting the LPs together to come into a
[00:37:52] Jake Clopton: joint venture.
[00:37:54] Jake Clopton: So we're not a broker dealer. I don't do anything that's like real estate securities, but we can connect people as like joint venture partners.
[00:37:59] Randal McLeaird: Got [00:38:00] it. Got it. Okay. So if you're looking for that, then definitely reach out to Jake is contact infos in the show notes, a wealth of knowledge. I really appreciate you jumping on and sharing your information.
[00:38:07] Randal McLeaird: And awesome. Thanks so much. Did you know that 80 percent of the agents we speak with got into real estate in order to gain passive income so they could obtain financial freedom and become work optional? If you want to stay up to date, the best way is to make sure you're subscribed. So if you haven't done that, go ahead and do it now.
[00:38:24] Randal McLeaird: We'll catch you on the next episode.