How to Leverage Commercial Real Estate Financing for Long-Term Wealth with Jake Clopton - REIA 496

Welcome to Streams to Impact, the podcast where busy professionals are empowered to develop multiple streams of passive income built on solid, secure, hands-off commercial real estate investments. This show is not just about wealth development. Every episode, we dive deep into inspiring conversations with professionals who are living life to its fullest while making significant and meaningful impacts on a world in great need. Engage with us each week and discover how you can thrive and flourish abundantly in all areas of your life. Now, here is your host, Dr. Allen.

Hello and welcome to Streams to Impact. I'm your host, Dr. Allen, and we're so glad that you can be with us today. Our guest today is Jake Compton, and he is a serial entrepreneur, author, An economic specialist in real estate and finance. He founded Clompton Capital in 2009 to provide efficient access to debt and equity for commercial properties. Jake also owns Clompton Insurance Services, a nationwide insurance agency, and several apartment communities in Chicagoland. He is the author of Commercial Real Estate Investing, And he contributes regularly to publications like Benzinga and National Mortgage Professional. Jake has appeared as an expert guest on shows such as Good Morning Chicago and The Viewpoint with Dennis Quaid. So welcome, Jake.

Thanks for having me on. Appreciate it, Allen.

Take us into the show, would you? And just let's start off with— let's talk about the macro trends that you are seeing in commercial real estate. And what's going on there on the macro side?

Well, the biggest story on the macro side is rates right now, right? I think we've hit peak rates and we're starting to come on the downslope now. You know, we just had a rate decrease. I think it's— I think it's got— we're going to have to see, like, you know, what the path of rates ends up being and how quickly those come down. But, you know, I do think now is A great opportunity that now that the cost of capital is, you know, has gone up and now is starting to come down, to kind of find an entrance into a lot of real estate assets. You just get that, you know, lower-cost capital cap rate arbitrage thing going on. And, you know, now would be the right time to start looking for investments. Just the lower cost of capital alone is going to push property values, you know, higher, but you're going to get a lot of, you know, other demographic and macro trends that are going to help push values up.

Yeah, it's just been strange markets over the last, last several years here.

That's a good way to put it.

Yeah.

First COVID, now this. Yeah. So I agree.

The trends did not really trend as predicted in most cases, I would say.

Yeah. Right. The trends weren't trending. I guess that's a good way to put it. You know, there was such a run-up, you know, during the teens. And, you know, everybody, I guess, was wondering when that was going to come to an end, right? COVID didn't necessarily stop the trends. I think COVID actually exacerbated a lot of the, you know, those macro trends. Because it just injected so much liquidity into the system. I mean, it certainly didn't help office, right? But that's a different story. But really, it was, you know, the Fed raising rates that, you know, brought a lot of those trends, like, you know, like multifamily rent growth to a halt. You know, that said, you've still got the right demographics in place for multifamily housing. You just have a huge, you know, supply constraint and You've got a growing population and there's a huge lack of housing out there. But we have to start looking at things more in localities than just overall picture for the entire country. Because if you look at just the Sunbelt region, for instance, they had such a run-up in rents. But that's the place where I've seen a lot of the trends weren't trending the right way, right? You would have thought anywhere in Texas or something like that, those deals would have worked out. But a lot of people ended up buying when things were pushed already and the expectations of rent growth didn't pan out. That's why a lot of those properties are— there's nothing wrong with some of those properties, right? They just, they just got into high-leverage debt and, you know, some of the rent growth didn't work out. So I've seen a lot of that, and that's a good example of the trends not trending.

And short-term loans.

Yes. When you get high-leverage short-term loans and, you know, you're You know, the economics of your deal don't work out to what your pro forma thought, that you get in a tough spot.

And saying that the TRINs didn't work like they were projected to work is that so many people, unless they found themselves in actual difficulty with short-term loans and they had to do something, Most sellers were holding on to the teen prices, whereas there just wasn't a market for what the sellers were wanting.

Right.

And the only sales that were coming through were distressed sales.

Right.

And is that going to change? Are buyers' expectations going to have to change?

Yeah, it's a good question. It's basically the bid-ask spread, right, between where sellers want to sell and where buyers want to buy. And the difference between buyers and sellers is, you know, you have buyers who on the one hand have a very high cost of capital. And at the end of the day, commercial real estate is just a math problem. If the cost of capital is really high, you have to come in with more equity. And that's, that can be really difficult. And so realistically, what that ends up translating to do is, you know, lower bids on their side where they can actually make these deals work with what is in place today. On the flip side of that, you have sellers who are saying, well, what, you know, the cost of capital is going to come down significantly over the next year, and the value of my property should be higher this time next year or 2 years from now than it is right now. So if I want to sell, You know, if I'm not forced to, I'm gonna— I'm not gonna take some, you know, lowball price just because a buyer needs, you know, would need to come in for more equity. They'll just wait. So you have that kind of cat-and-mouse game going on. At a certain inflection point, you know, either the underlying economics of the properties are going to catch up to where the cost of capital is, or the cost of capital is going to lower to where the economics properties are, to have these 2, you know, 2 parties meet in the middle. But right now, there's, you know, we're still, you know, rates are pretty high, and they came down a little bit, but they're still pretty high. And that's where the challenge is, really.

Yeah. And so many things going on geopolitically. A lot of uncertainties still remain, even though I think the interest rates are projected to continue to decline.

Right. Um, that's absolutely right. I mean, I don't think, um, I think a lot of people in the real estate industry understand how, like, geopolitics can play into some property located in Chicago, right? But when you look at what your cost of capital is based on, right, it's based on an index, which is, you know, treasuries. And treasuries are an international product. So yeah, very much so. What happens on the other side of the world can affect your deal because those indexes will get affected. I mean, that's exactly what we saw going on, you know, with Russia and Ukraine and the inflation that that caused and how that affected the tenure and all this stuff. So I mean, that's just one example. But yeah, I mean, you're absolutely right. I mean, keeping an eye on, you know, geopolitics is definitely a good idea. especially when you're going to be tied to, you know, the 5 or the 10-year Treasury rates.

Yeah, and, uh, and then on top of that, an election year.

Yes.

Just a lot of questions.

Yeah, there's a lot of, um, there's a lot of uncertainty out there, and I feel like a lot of people think there's some black swan event out there that's going to cause the market to crash. And I don't know, maybe, right? I mean, the thing about it is you don't see it I don't know. But it's hard to, I guess, prepare for that and/or operate under the assumption that it's going to happen. I think, you know, you put in place today, you know, with the way things are today, and then also protect yourself against, you know, something like that happening.

As best as you can, of course, living through 2008. Yeah, I guess I'm probably more leery of those black swan events than some people are. Oh yeah.

Yeah, well, I mean, just think about everything that's happened since 2008. It's like every couple of years something happens now.

Well, in looking at— and I mean, really all we can do is to look at past trends and base our assumptions really on the fact that That these trends have been trending really for the last 100 years, and it would take a really, really black swan to change things considerably.

Right.

So that's all we can do is to go on those assumptions there. So looking at those assumptions, what segments are outperforming? You mentioned multifamily. Housing shortages still seems to be one of the better segments. What is your take on the overall look at the various different segments?

Yeah, I think for most people, especially those that want to be like limited partner investors or something like that in like a real estate deal, multifamily is probably going to be the safest bet, right? I mean, All the demographics and all the economic trends point to that being a pretty safe bet. There's other sectors, you know, where you can get higher yield. I don't know if I would suggest that like a lot of people be limited, kind of like silent partners and stuff like that. Like some of the things we do are areas that like private equity funds are chasing, right? Like self-storage right now, you membership-style car wash deals. Those are areas where I see like a lot of private equity funds chasing those properties to grow portfolios. I think there's a lot of opportunity there, but those are much more complex deals, right? I mean, those are operating businesses, and multifamily is too. But I would say multifamily is much more stable generally, just throughout the country, than some of these other more more specialty property types. But you can get outsized returns in those types of deals. But with higher returns comes more risk, right? So I would say for most kind of silent investors and people that want to be limited partners or get involved in syndications, probably stick with multifamily. And/or there's probably some industrial deals where you have a credit tenant or something like that that can be really lucrative as well and pretty safe. So I'd say probably those 2 areas is probably like the best bet right now.

Well, what are you seeing in terms of apartment as opposed to mobile home parks, both multifamily segments? What do you see the difference there?

I mean, I would, I would probably classify, you know, mobile home parks as, you know, part of just the habitational area. It's a little bit more specialty though, right? You know, those tend to be in not as highly populated areas and, you know, a little bit different demographic of people. But I've seen, you know, some operators do extremely well. That said, if, you know, I think it comes down to who you're investing with, right? I mean, if you have an operator that specializes in mobile home parks, Okay, cool, great. They've done 10 deals or something like that. They really have the expertise to manage that type of asset. And they're not somewhere completely across the country and just going to throw a third-party management company in there. I'd say that that's probably something that I would be interested in taking a look at. If it's some guy who sees a mobile home park because it's got a good cap rate and he wants to raise some investors around it and he's in New York City and it's in Alabama and they're going to put a third-party manager in there, And I've seen this exact scenario, right? That's something I'd be a little more leery of. Uh, you know, mobile home parks, I, I think it does take the right operational expertise to do that type of stuff. It's a little bit of a different asset, but it's still habitational. It's still got the right demographics going for it. Um, but, you know, those— some of those are in pretty out-there areas, you know.

Mm-hmm.

So I've, I've been a little bit more careful with those than I would just Yes, as you get into the tertiary, the secondary even, but certainly the tertiary areas, contractors are just not as reliable.

Right.

And you're just kind of at their mercy in many situations.

Right.

So that's my concern.

Right. You do also get into the whole, like, who owns the house, right? I mean, typically, mobile home parks are really, you own the land, the lots, and the hookups. And you try to lay off that mobile home to whoever the tenant is and/or have them buy it and put it on there in the first place. But I see a lot of guys go into there and own those. And that's one aspect of it that I think a lot of investors going into it wouldn't realize that you can't really take that home rent, you know, for into account when you're valuing these properties. Um, so there, there are a few like different aspects when it comes to mobile homes than there would be just for a typical multifamily deal that, you know, some people may not know or realize going into it can affect the value.

Yeah.

What about RV parks?

That I would not throw into the You know, habitational area. That's— I really consider that almost more like hospitality, right? I mean, that's the RV park. I mean, that thing can just flat out just drive off, um, and that's really more of like a vacation type of thing. Although I know some people, that's a lifestyle for them, and, you know, they, they go and live at RV parks. But that's much more of a different animal, uh, especially when you have a property, for instance, where It, it could empty overnight. It's certainly a different animal.

Right. What segments would you just absolutely stay away from?

What segments would we absolutely stay away from? I think for, for most, you know, investors, getting into property types that I kind of view as more business than investment real estate, unless they really understand what they're doing, probably stay away from it. And like, there's a couple I would throw it out there, like hospitality, like hotels, um, maybe even assisted living facilities, stuff like that. I, I think a lot of people got into those types of properties a while back thinking that like, hey, this is investment property, when it's really more of an operating business, especially in the, you know, the assisted living, memory care side. There were so many of those I saw go up, you know, 10 years ago. And right, I mean, everybody thought like the demographics of these properties were certainly on the way. We have an aging population, all this stuff, and they're very much so needed. The challenge with, you know, properties like that is controlling the expense side. A lot— I saw a lot of, you know, again, just for example, assisted living facilities lose money even though they were, you know, close to fully occupied because because the expenses just got so far out of control and/or they were mismanaged. So when you're dealing with property types that are more of an operating business, you have such an operational risk, you know, for the business. And, you know, it's very much so dependent on who your sponsor is and who's operating that property rather than just, hey, it's a building and, you know, we're— yeah, there's also operational, you know, risk here as well, but, you know, it's leases And, you know, it's a little bit more stable. So those are, those are probably property types that if, you know, sectors, if, you know, that I would tell people probably stay away from if they're looking to be like silent partners unless they really understand what they're getting into. Because you have a different type of risk with that type of stuff.

Well, that's pretty much my take on it as well. What about student housing?

Student housing, again, you know, Yeah. But it is, again, a different animal. You know, when you're dealing with just students and typically 6-month leases, you know, I think if you're in the right spot with student housing, you know, it can be a great investment. But, again, I've seen a lot of these student housing deals that worked great for a couple of years, but then, you know, that market got incredibly oversupplied and now they're struggling. So, that's a completely different demographic set and it's so much dependent dependent on wherever it's located and whatever university it is. I would be really careful with that as well. And if you're going to get involved in student housing, kind of stay with only, you know, some of the top-tier schools, because we've seen so many smaller universities either disappear or struggle with enrollment, stuff like that, especially since after COVID. Um, you know, and a lot of them are saddled with a lot of debt. So I mean, that, that's something I would definitely be careful with.

Yeah. And And I mean, if it's specifically student housing, it's usually constructed for, for joint living.

Exactly.

And it's converting it to any other type of housing would just be almost impossible the way that they have constructed those.

Exactly. I mean, it's built to be rented by the bed, not by the unit. Yeah, right. And there's, there's specific layouts for it. Probably not something I would recommend for Yeah.

And then you— then they all also, they come furnished. And I can't imagine really the expenses of trying to keep up with that. I mean, to keep them rentable, particularly in a competitive environment, you'd have to be replacing those furnishings.

Oh, yeah.

Yeah.

Yeah. I mean, it is a lot of management and like operational side to, you know, manage that many different leases and tenants and get it retenanted every 6 months. Right. With the semesters. Yeah, it's a little bit more challenging than your standard multifamily.

Is multifamily where you see really the greatest opportunities or is it— you would say it's the greatest opportunity With the greatest risk mitigation.

Yeah, I mean, I would say it's your best risk-adjusted return. But then again, in, you know, multifamily, there's still, you know, you still have to be careful, right? I mean, I see probably the greatest opportunity in like workforce housing for multifamily. I think a lot of the Class A stuff got a little bit overbuilt, you know, and also we're potentially going into a challenging economic period. And that type of really expensive Class A housing rents is probably going to be challenging for a lot of people. Whereas in workforce housing, you can have kind of that transitory effect of Class A people coming down to it, or maybe Class C properties coming up to it. So you have potentially a lot of people moving in and out of that sector. The other thing to pay attention to a lot would be just geography and the local demographics of where you're dealing with, right? I mean, going into, again, an area like Sunbelt Texas where we saw a lot of people move and lots of population growth may not necessarily be the best deals. Maybe rents, you know, have hit their high and they're stagnated now, and/or there was, you know, just too much supply. So, you know, I mean, really, you still— I think it's, you know, you start with like a funnel, right? You've got the top, you've got your really good demographic economic trends of the sector, and then you can drill down to the right property going from geography, property sector, multifamily, stuff like that. You have to pay attention every step on the way down, but I still think for most investors that want to participate in a syndication or invest into a deal, it's probably the best bet.

Well, we are talking today with Jake Clopton. Jake Clopton, and he is the founder of Clopton Capital, which does a number of different things. They are a finance company and an insurance company. And as you can tell from our conversation, Jake has a lot of insight and wisdom to help us out in conjunction with these things. So Jake, give you a moment here to just tell us a little bit about who you are, how you got into the finance and insurance industries, and tell us about Clopton Capital.

Yeah, so I started this back in like the 2008-09 era. Before this, I traded interbank hedging product futures like 3-month LIBOR, Fed funds, like that here in Chicago. And as you all know, that disappeared pretty much overnight. So, tried to figure out a way to, because of the credit crisis, connect people, well, borrowers with capital providers. And that's what we do now, right? We're an intermediary connecting deals with capital. We started the other verticals. We're an insurance company. We're also a sales brokerage. We're a 1031 qualified intermediary. And we do commercial solar installation. We started those because it's all the same people, right? So we started, you know, kind of expanding from being just a capital markets firm to more of a commercial real estate services firm so that we can offer the people that we're already dealing with, you know, different, you know, service aspects of, you know, for the assets that they're either acquiring or about to acquire. So, you know, we'll probably step into one or two, maybe two other verticals. As far as, you know, insurance, insurance is another really interesting thing that I'm sure everybody has realized is, you know, going up a lot, um, and probably going to continue to go up a little bit further. Uh, so our insurance agency has really been helping out a lot of people because we're 100% focused on commercial property, and, and most, you know, most groups out there are not, right? They'll do like everything, your house, your car. car, workers' comp, all this stuff. So we take kind of the same approach where usually your typical insurance guy will just give you renewals and not really shop it or not really access too many markets. We take the same type of wide netcast approach that we do on the capital markets side to find the best deals and approach every market we can. So that's really us. We probably are going to add a ton title service here in the next couple of months. But that might be it because that's kind of a lot already.

Yeah, that sounds like you got your plate full there.

Yeah, there's a lot of good people that work with me that handle the other sides. I still do all of our day-to-day on the capital markets side. We just brought on another guy that is heading up our equity side. And I'm focusing on primarily like first lien and Like, you know, higher cap stack sub-debt type products.

Okay, well, you can find Jake at CloptonCapital.com, and as you can see, lots of services there that they provide real estate investors. Jake, talk to us a little bit here about how are the various capital sources different and how do they affect different investment opportunities?

Yeah, so we use banks, credit unions, life insurance companies, private debt funds, private equity, you know, government agencies, venture funds, basically any capital provider that's out there, right? And the way that I'll know which one is a fit for any deal is really trying to understand things from like the equity down. Meaning, like, who are the sponsors? How was this thing put together, right? I mean, there's a big difference between a deal that's just, you know, one guy and he owns everything versus a deal where it's syndicated and it's, you know, one general partner, but then, you know, let's say like 100 different limited partners, you know, in the equity stack as well. What that comes down to is the difference between, like, you know, is there recourse available for it, meaning like a personal guarantee, or does Need to be non-recourse. That, you know, in itself will give me a good direction. And then, you know, a step down from that is really understanding like the strategy of the property, right? Is it a value-add deal or is this just like a stabilized acquisition type of deal? Usually, you know, a value-add would be, you know, if you're going into a property and performing some sort of turnaround, either operationally or rehab. Usually we end up in the private debt fund space. Debt funds tend to be like your shorter-term, higher-leverage, easier underwriting type of capital stuff that banks and depositories don't necessarily like to do. If it's more of a stabilized deal and we're looking for long-term, low fixed rates, we'll end up with either banks, credit unions, or maybe like Fannie Freddie or life insurance companies, something like that. So really understanding, like, really the equity, then the property, and then what, you know, what each different capital source, you know, what their money wants as far as, like, returns and duration kind of gives us an idea of, you know, who the best players and capital providers are going to be for any deal.

Well, Jake, for those of us raising capital, what are the different ways we can go about raising capital? And how do we do that?

On the equity side, right, there's a couple different ways to go there. And the main difference is, is it a joint venture or is it a real estate security? And I think you have to be really careful about that also, because if you start getting into the real estate security space, you know, you've got a lot of regulation you need to deal with. You know, joint ventures, that's more of a partnership, and that's that's not really, that's not a security, right? The people, and the biggest difference is, do your investors have a say in what's happening, right? If they're silent investors, that's a real estate security. That's like a Reg D offering or something like that. Even if it's not a Reg D though, like the makeup of like the investment still kind of dictates whether it's security or not. If you're doing joint ventures, right? I mean, you can go directly to private equity funds, Use someone like us to get access to stuff like that, family offices. If it's a real estate security, you really need to either do a Reg D or go through a broker-dealer, registered investment advisor, or something like that. So, if you're going to start raising money, the first thing I would really understand is what type of money are you trying to raise, and then what type of regulations around that money there are. And that'll give you an idea of who you need to go to, right? I mean, can you go to just a capital markets guy like us to find joint venture, or do you need to go to a broker-dealer, you know, to sell securities? That's the biggest place to start, and that'll tell you where you need to go.

All righty. Well, Jay, thank you so much for being with us. And viewers and listeners, thank you for joining us today.

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