LUR 65 | Passive Investing

 

If managed properly, passive investing is an excellent source of income. Though it doesn’t call for your full attention at all times, adequate planning and strategies must still be put in place. Exploring this vast topic with Lisa Hylton is the Founder of Roll Investment Group, Jeremy Roll. Sharing his transition from single-family homes to multifamily properties, he focuses his discussion on the most common pitfalls, red flags, and mistakes in passive investments and how to approach each one. He also talks about the most practical strategies when investing not only in multi-family but also self-storage, senior living homes, and mobile home parks. Finally, Jeremy delves into the right way to approach office spaces, the retail industry, REIT, and JV investments, all with financial independence in mind.

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Conversations With Passive Investors – Achieving Financial Independence Through Passive Investing With Jeremy Roll

In this episode, I have with me Jeremy Roll. He started investing in real estate and businesses in 2002 and left the corporate world in 2007 to become a full-time passive cashflow investor. He is an investor in more than 60 opportunities across more than $1 billion worth of real estate and business assets. As a Founder and President of the Roll Investment Group, Jeremy manages a group of over 1,500 investors who seek passive/managed cashflowing investments in real estate and businesses. Jeremy is also the Cofounder of For Investors By Investors, also known as FIBI.

It’s a not-for-profit organization that was launched in 2007 with the goal of facilitating networking and learning among real estate investors in a strict no-pitch environment. FIBI is now the largest group of public real estate investor meetings in California with over 30,000 members. He has an MBA from the Wharton School, a licensed real estate broker in California for investing purposes only, and an Advisor for RealtyMogul, which is the largest crowdfunding website in the United States. I’m super excited to have Jeremy on the show. Welcome, Jeremy.

Thanks so much for having me.

Can we start with how you got started investing in real estate back in 2002?

Thanks again for having me on and I hope this episode will be helpful for a lot of people. Back in ‘02, I was working in the corporate world and the dot-com crash just happened. I was sick and tired of the stock market for two primary reasons. One is obvious, which was the volatility. That bothered me a lot. I’m a low-risk, low and steady guy, so to watch the market go up and down 30% a year is not a good fit for me. Even more importantly, what I realized is that the lack of predictability of where my retirement account would be in 10, 20, 30 years was the real motivator for me.

I started looking at different ways to invest. I came across the concept of cashflow. I’m talking about having more low-risk and predictable cashflow coming in that would help with that predictability. I decided that real estate was one of the better fits for me from a cashflow perspective. I started going down that path in early 2002. I invested in real estate, non-real estate and all different types of real estate but real estate ended up being a good fit for me, targeting lower risks and passive cashflow. Passive was also a great fit for me because I was working at Disney headquarters at the time. It’s crazy busy and I didn’t have enough time to do anything active myself. I started out in the passive path back in ‘02.

LUR 65 | Passive Investing

Passive Investing: Wall Street has allowed to market what they want, which are mostly stocks and bonds, and you just don’t hear about other stuff.

 

Back in ‘02, you started passively. Did you ever buy single-family homes or anything of that nature or was it strictly passive investing?

I know a lot of people start with single-family, maybe go to smaller multi-family and graduate from there. Mine was completely different. I started on syndications right away. I don’t remember the first deal I did. I need to look that up but it was either retail or office to give you an idea. I started right into that type of syndication. It wasn’t because I said, “Which asset class do I want to start with?” Lifelong friends of my family who had been syndicating for 10 to 20 years at that point. I knew by testing the waters with them, I can learn a lot from them. By default, I went with them first, and eventually, I learned about all the different asset classes. Now, I’m in many asset classes but that’s how I started back in ‘02.

The question that I was going to ask you was, “How did you find out,” but it sounded like you found out about these opportunities initially through friends and family who are already doing that stuff.

Even now, there are some structures that are being publicly marketed, which back then weren’t a lot at all. Even with that, the majority of opportunities, there’s still not a lot to be publicly marketed. I don’t want to sound like a conspiracy theorist, but the reality is that Wall Street is allowed to market what they want and that’s mostly stocks and bonds. You don’t hear about other stuff. A lot of that has to do with Wall Street trying to keep a lot of the assets under their own management. It’s a tough nut to crack and to learn about this space.

From 2002 until 2020, you’ve been investing passively. Can you talk about an advice that you would give to passive investors? People who find themselves in a similar situation who have good jobs, work super long hours but would like to passively invest in real estate.

Let’s take COVID out of the equation because right now the challenge with COVID is that the way that I started is that I’d go to two events a week in LA, learn and watch people talk about different asset classes and network to a bunch of people. It was a lot of years of me doing a lot of networking and learning. Right now, the networking portion is on pause. Let’s say you’re like, “I want to start passive investing. I’m interested in multifamily.” What’s very interesting is there are hundreds of meetings every day of the week that are accessible online. If I live in LA, I could probably attend a meeting in New York City that’s virtual.

You have an amazing amount of choice that wasn’t even there a few months ago where you can go and do a ton of learning without even having to get dressed, go in a car, pay for gas, spend time in a car, and all the rest of it. You could do it in your pajamas literally. There is an amazing learning opportunity that exists now that didn’t exist before. It’s maybe temporary, we’ll have to see but if anyone is thinking about that now and they want to learn, it’s become unbelievably more efficient to be able to learn much easier.

When you give up control, you end up in a position where you're actually increasing your risk. Click To Tweet

I will say this as well. The crowdfunding sites started to come up after the JOBS Act was passed in 2012. They started about 2013 or 2014. If you’re really busy and you’re okay with the concept that there’s going to be an intermediary, a middleman involved so that your profits will be a little lower than if you invested directly with the person managing the deal in exchange for someone finding and vetting opportunities for you, the crowdfunding sites can be a potential solution if you’re busy in the corporate world. If you don’t want to network, for example. You still need to go through learning if you don’t want to do networking.

Networking is much easier to do even when I started because you can do that online through BiggerPockets, which is the largest real estate community online in the US. You can do it going to these types of meetings but now virtually. I could tell you for a fact, some of the meetings specifically try to enable networking still virtually. There are conferences that didn’t exist until a couple of years ago that some people were running. I co-managed one of them through FIBI in LA. Those conferences are all about networking and learning. You can go to a conference that has 3 to 800 people all in one spot and watch a ton of panels, speakers, learn a lot, and network a lot at one shot.

If you live in a big city, there may be one right near you, if not, you may need to fly to it so that could be challenging. Those exist now that didn’t exist before as far as accelerated networking and stuff. Some of them are going to become virtual and they’ll have a networking component to them as well. We’re working on ours. We’re in the middle of trying to brainstorm, how do we get the most networking opportunities possible in a virtual sense because it’s very hard but it’s still doable. There are lots of tools out there for someone who’s brand new, who doesn’t want to network or is dealing with COVID and can’t network as easily. A lot of learning tools that will accelerate.

To put it in perspective, when I started in 2002, the way I had to learn was I had to go in-person to a bunch of meetings to find opportunities in each individual one. I had to learn by going to those opportunities listening to speakers. Now you can sit at home, watch speakers, and potentially network with other people all over the US in your pajamas and you can find opportunities on crowdfunding sites. Another way to find opportunities is some investor groups exist now that you can connect with who again, most of them act as an intermediary. If you’re okay with a smaller return, you will get more deal flow by going into those groups as well. You just have to make sure you do your own due diligence and understand exactly what you’re getting into. You cannot rely on somebody else. You need to learn enough to be able to vet things yourself. Those are some ideas for people who are sitting at home trying to figure out what to do.

You talk about people needing to do their due diligence. Given your period of investing, what have you learned along the way in terms of pitfalls and things to red flags or things to look out for as people start entering the water of investing this way?

LUR 65 | Passive Investing

Passive Investing: Don’t just invest with somebody just because your friends with them. You need to evaluate it on your own and make your decision.

 

I’m going to try and keep it high level because we could talk about this for hours. What I’ve learned along the way is number one, in my opinion anyway, who you’re making a bet on when you’re passive is even more important than the actual asset, with the asset being a very close second. I say this because you give up control when you go passive. I’d like to tell people, I give up control in exchange for diversification and you get some other benefits. You get to leverage someone else’s expertise, time, money, credit, etc. but you trade control for diversification. When you give up control, you basically end up in a position where you’re increasing your risk because you could have fraud risk and mismanagement. There is a 1% risk that you can never get rid of and diversification can help.

The bottom line is who you’re making a bet on is extremely important because you have those potential risks but you also have execution risks. That’s number one. Number two is the property. I would say number one is the person. That’s very important. That’s one very important tip. Number three, I would say if you work in the corporate world and you’re used to seeing buttoned-up PowerPoint presentations that look amazing that are polished. I used to work at Disney headquarters. That’s what I was used to. You see some presentations that look a little subpar. That can be the norm in this type of investing.

I would tell you not to get turned off because presentations are adept. It doesn’t quite look as polished as you would expect it to be. That doesn’t mean that the operator won’t perform and over-perform. I like to tell people that I’d rather invest with the best operator with the worst documents than the worst operator with the best documents. The documents are important but that’s something I had to get used to as well. You’re going to want to look way beyond that to understand who you’re making a bet on. The documents can tell you some important information. It can tell you how detailed somebody is. If it’s sloppy, that’s a huge red flag. That’s another very important tip. You want to take the documents, read between the lines and understand who you’re making a bet on.

You want to be able to look at the numbers, even the phrasing and understand, “Is this person conservative or are they aggressive? Are they using aggressive numbers to make the deal look good? Are they a hard marketer where they don’t care about building a long-term relationship with you but they’ll attract you because the numbers look good and they’ll move on to the next person for the next deal? Are you try to find somebody who’s conservative who tries to under-promise and over-deliver for investors to build long-term relationships with investors?” That’s who I look for. That’s a very important point for me. It also aligns with my personality but still, more importantly, you want to read between the lines and try to avoid the wrong people to make a bet on.

It's better to have the worst documents from the best operator than meeting the worst operator with the best documents. Click To Tweet

Another thing I would say is if you’re new, I would strongly recommend learning one asset class and start with the one that you can relate to the best so that it’s the smallest learning curve. For example, I find it very common for people will start by trying to analyze apartment opportunities because perhaps they live in an apartment or have lived in an apartment in the past. They understand it’s a relatively simple business model and they understand it. They can understand the landlord, the tenant and what goes into it. They’ve been marketed to on the consumer side.

If you contrast that with, for example, a senior living facility that has many employees and all different levels of care, you may never have dealt with one before and you have no clue how to analyze or even think about it. If you’ve never used a self-storage facility before, that’s a business. You may have a hard time understanding how that needs to be analyzed from an investor perspective. Start with something that you understand about the space is that, a lot of what you learned is a good framework that can be copy and pasted, or transported into another asset class. For example, an expense ratio, looking at property tax on the line and what the assumptions are or rent inflation assumption, expense inflation assumptions or cap rates. All these things can be translated across opportunities with some tweaks in the different asset classes.

I recommend starting with an asset class you’ll understand the best and then go from there or the ones that interest you the most but try to keep it simple when you first start. That’s definitely important. It would be very helpful for you to build that base first. Do not invest unless you’re 100% comfortable. What I mean by that is you’re going to want to get enough education to the point where you feel confident enough that you understand what you’re investing in and you think it’s the right deal for you to invest in. You could be right or wrong but you’ve got to have enough understanding. Don’t invest with somebody because your friends are investing with them. You’ve got to be able to evaluate it on your own and make your own decision. That’s very important, especially because when you’re passive, you’re giving up control.

As soon as you invest, your shares are illiquid. Your ownership in the company is illiquid. I think it’s illegal for the SEC to resell your shares of purchase like an anti-flipping law. Even after that, it’s very hard to find a buyer. Nobody knows what the building’s worth. You may need to sell it at a discount. You’re going to get locked in, so you’ve got to put a lot of time upfront to make sure it’s the right deal for you. Don’t underestimate that or don’t sell yourself short on that research. Another thing I would say is that we’re recording this in June of 2020 and we started our session.

Let’s take COVID out of the picture because COVID complicates things in many different ways. People don’t know when jobs are coming back or not. Make it more simple. We’re in a recession. That’s a fact. It’s been officially declared. It’s not like, “Maybe we’re in a recession.” What happens in a recession is that it takes 1 or 2 years for prices to typically adjust and potentially drop out as they bought them out. If you’re looking at a deal in 2020, be very careful. We have an election year. That can definitely distort things. Depending on who gets elected. They may have different implications on investing in taxes and effects on property values going forward of different types.

Furthermore, if you want to be very careful and you’re very concerned, you’re going to wait for prices to adjust into 2021 and see how it goes. This is not investing in the stock market. Things don’t change every second and you cannot get price discovery in a day on what Apple or a property is worth. It doesn’t work like that. It takes a long time for things to adjust. Be patient and be careful right now because, in my opinion, 2020 is a dangerous time to invest for many different reasons. 2021 may be a great time to invest in.

That brings me now to my next section of questions which is talking about different asset classes. Given your experience investing in some of these asset classes, what are your thoughts for people who are considering investing in them now? The first one is multifamily. What insights would you give to people as they think about investing in multifamily?

Some of these will be the same across the board. The number one thing is location is important. You’re going to want to understand your market. This is the same for all the classes. You’re going to want to get a sense of, are you in an area where the population is growing, staying the same, or shrinking? Are you in an area where the economy is growing, staying the same, or shrinking? What does that average household income look in the exact block that you’re investing in the area that you’d be looking to invest in? Does it match with the product you’re going to be providing? You’ve got to get to even a further level. Let’s take multifamily specifically. You can invest in what’s considered class A, class B, class C or even lower facility.

I tend to target a range. Mid-range are middle-income people and the reason why I do it is because it’s harder to collect rents when you’re investing in a class C building. That tends to be a little bit less predictable, I would say. In a class A building, that could be more volatile both in the asset class value but even especially during a downturn right now. Rents can be adjusted even larger on a percentage basis they tend to be than a class B or C building. To me, class B matches my investing strategy and what I’m looking for, which is more stability. That’s my own opinion.

LUR 65 | Passive Investing

Passive Investing: Anything that comes your way that does not match your plans is not worth your time.

 

When you’re looking at an apartment, you’re going to want to consider what type of apartment you want to go into. I personally don’t invest in apartments unless there are 100 units or more because I’m a huge fan of diversification. I want to be clear. You’re asking me, there are 1,000 ways to invest and none of them are wrong. This is what I do. Whoever is reading, just because I’m doing it doesn’t mean it’s the right fit for you or whatsoever. I invest to stabilize cashflow opportunities. You may want to do development. I was on the phone with somebody who was looking for development. There is nothing wrong with that.

You want to take a look at the type of asset and develop a strategy. When you figure out, “I want more than 100 units. I want to be in A-minus or B market as far as population size and all that type of thing.” You want to be in a class B building and you want an experienced operator. Let’s call it those four to keep it simple. Anything that comes your way that does not match that, it’s not worth your time. You’ve got to create a target box and stick to it. I am a huge believer in that because once you start to build up a bigger network, you’re going to get more deals. You don’t want to get distracted into a deal that isn’t the right fit for you or perhaps one that you don’t quite understand as well as you should. Keeping your eye on your box is really important. That’s an overview for multifamily, as quickly as I can do it. Understanding the class and the location of multifamily is important.

The next one is self-storage.

Self-storage is a very different asset class. It’s more of a business. The returns can be a little higher, but it’s also got a little bit higher execution risks than multifamily. As I mentioned, I’m a huge fan of diversification but in self-storage, that’s different than multifamily, as far as how big the units are. I typically target at least 300 units. I frankly prefer more than 500 to 800 units even. As much as that sounds big, they’re out there. You can find 1,000 or 1,400-unit self-storage deals out there easily. Someone who’s got a lot of experience in self-storage would be helpful. I say that because self-storage is very tricky. If you ever talked to someone who’s in the business and you say, “I’m looking at a self-storage property. It’s 100% occupied.”

In multifamily, that sounds fantastic. In self-storage, that’s a huge red flag. The reason is because in self-storage, if you want to optimize income, you don’t want to be 100% occupied necessarily. It means you’re not charging enough. It may make more sense for you to be 92% occupied plus 100% occupied doesn’t make sense because you’re constantly turning. If you’re in a 1,000-unit facility, you’re never 100% occupied to be realistic. The point is that you want to be maybe 88% to 92% occupied. Some people would even say it’ll be down to 88%. Both are because of turnover and optimizing price. You want an operator who focuses on optimizing price. You don’t want to leave money on the table.

A quick example. There are some operators who will say, “I’ve got a 10×10 unit, one left and I’ve got four 10x20s.” I’m going to charge more for the 10×10, the one that’s left than 10×20, the one that’s twice the size because I’m optimizing the demand and the actual income per unit based on the actual supply of exactly what I have left. It’s not just, “The 10×20 is $20 and 10×20 is $30,” and that’s what it is. You need a sophisticated operator to maximize things. The operators all have very different strategies to use. Some of them try to maximize retail sales in front, tape, bubble wrap, and all the rest of it boxes. Some of them don’t worry about that as much and will give you a free bottle of water when you walk in or they’ll give you a free moving truck that they own to move in. The other ones are going to rent you the moving truck. That’s a little bit more sophisticated in understanding who you’re making a bet on and what your profit potential is in that asset class versus a lot of others.

I’m going to take two more. One being senior living and then the other being a mobile home park.

Let me talk about one more thing. We can talk a lot more about self-storage. With self-storage, location is very important. Some locations are overbuilt. Drive-by traffic typically is at least 50% of the actual revenue you end up getting. In other words, 50% of the people who are in there at least are from a drive-by. There’s a lot of other things to consider. Keep all that in mind. Senior living is similar to multifamily where you want to choose class A, B or C. In senior living, what you want to choose is which type of senior living facility you don’t even want to get involved in.

They are A, B, C classes but equally or more importantly is that there is a huge spectrum of verticals that senior living operates under. That’s not like other asset classes. For example, you can go into a 55-plus age-restricted apartment community. Literally an apartment but all senior. You can go to an assisted living facility that has somewhat minor services and help. You can then go into memory care which is much more stringent. It’s dealing with people who may have Alzheimer’s or dementia. You can go with a skilled nursing facility. That’s different too.

All of these have different levels of care and they all have different returns associated with them because the harder ones to run are going to end up with a higher return. There are also less people who are willing to operate them versus a 55-plus age-restricted community is the easiest to run and may have the most demand against it because more people can understand how to run a department building. They don’t even necessarily have to understand the senior aspect of it. In that, it’s very important if you’re going to get into senior living, you educate yourself on all the verticals and there’s many more I didn’t mention, and then decide which ones are the best target for you from a risk-reward perspective. Which ones make the most sense for you and then take it from there. That by far, number one the most important thing in senior living.

Number two is who is the operator? Who is operating that property because it is a true business? There are some that have hundreds of employees. It’s funny, this is how much of a business it is. If you have a 200-unit assisted living facility, you could be delivering 200 newspapers a day. Let alone, coming to check on somebody once or several times a day, delivering them three meals, and helping to clean up the room. There are so many steps and people involved. It’s so operationally intensive. The operator is absolutely key. You’re going to want to understand who they are, their experience, and whether or not they’ve done that type of vertical in senior living before, and how much of that exact type of vertical they’ve done.

Senior living also can be potentially overbuilt in certain areas. That’s very important to watch out for. Most of the senior living deals that I see these days are development. If you’re not looking for development but you’re interested in senior living, I’m going to tell you because I have the same problem firsthand. It’s very frustrating. It’s hard to find stabilized or minor value-add senior living deals because they aren’t out there very much. It’s mostly development because the senior population is increasing and projected to increase and people are trying to meet that demand with all new units. If you liked development and senior living, you’re in a good spot. You’re going to find a lot of deals. You just have to hone in on who you want to make a bet on and which type of services will be offered.

Do not invest unless you're 100% comfortable. Click To Tweet

The last one was mobile home parks.

The most important things there and one of my favorite asset classes, for sure. In mobile home parks, number one, make sure you’re comfortable with your location from a weather perspective. One of the operators I’ve invested with 7 or 8 times is a top-five operator in the US. I remember a very important lesson from them. They’ll happily invest in an area with a bunch of tornadoes but they will not buy a park that is in a hurricane area. It’s an interesting explanation as to why. When a tornado comes in, it’s typically very isolated. It has a small path and it can go through your park and cause a lot of harm. If it goes through your park, it’s very manageable because what happens is that it’s not creating the same vast, widespread devastation that a hurricane can create.

FEMA will come in very quickly and help you onsite. You can get their aid. You can get people new homes and insurance companies can deal with it because it’s not across all of Florida. It’s not the same numbers and it’s much more manageable. A hurricane which can devastate, let’s say, Florida in its entirety or half of it, FEMA can’t handle that volume. The government and the insurance companies can’t handle that volume and guess what happens? It’s unmanageable. People can’t get back on their feet as quickly. You can’t count on government aid to show up. Insurance companies may not be very quick to provide someone with a new home and that could be a much bigger challenge. It could cause different types of destruction. That’s one example of one thing to very seriously consider in mobile home parks.

Another thing weather-related mobile home parks are piping can freeze and in the Northern states. I tend to stay away from the Northern states. That’s very important because that causes all kinds of challenges. You go to understand if you’re investing in a park that is city-owned water and sewer or it’s privately-owned water and sewer or it’s city water and private sewer. Within those types, you want to understand where is the water source and what’s a sewer source, if it’s private. I’ve heard of people getting foreclosed because they didn’t understand the sewage system they had. It broke and replacing was $500,000 and it wasn’t budgeted for it in a small park. Looking to see if the utilities are city or private and understanding that better is very important as well.

Another very important thing with mobile home parks is let’s put location aside. That’s obvious. You’re going to want to be somewhat close to or the closest possible to cities or very large employment bases to make sure people have jobs or have access to jobs. You got to want to understand if the park is majority owner-occupied or majority renter. It’s either owner-occupied homes, rental homes or park-owned homes, they call it. If you have a renter community, that could be a whole different ball of wax than mostly owner-occupied community. For those of you who’ve never visited mobile home parks, what’s so interesting is that they say about 8% to 10% of all housing in the US are mobile home parks. It blows people away.

What’s interesting is that if you have an owner-occupied majority park, you have a lot of pride of ownership. People are looking out for their neighbors, they’re taking care of their lawn. They’re keeping their house in decent shape and it’s a different mentality. You’re probably going to have less challenges in terms of the predictability of cashflow. If you got renters coming in and out, you’re asking for a lot more trouble. I doubt if you’re going to make more money. I’ve never invested in a highly rental park. The rental parks are the ones that people think of where you’re going to have all these different problems. Those rarely exist in owner-occupied mobile homes or home parks but they can’t exist in a majority of tenant parks. There’s nothing wrong with either of them. They’re just different investing philosophies with different risks, rewards and return. It’s something you have to be very cognizant of if you’re looking at a deal on that space. Those are some quick things.

Before I leave this, it would behoove me to talk about retail and office unless you’re living under a rock. Clearly, there’s been a lot of impact on the retail and I also guess on the office space. Could you talk about insights moving forward in investing in that area?

Let’s rewind it back to 2015. That’s about the year that I became no longer comfortable investing in retail or office. The retail was because of the internet ramping up and the office was because I have to think ten years ahead when I’m going into a deal because it’s illiquid. A lot of the terms I invest in are ten-year term loans. You have to think way ahead to avoid the landmines. Back in 2015, with the advent of self-driving cars down the road, not understanding what that means as far as where people want to live and what the demands are is going to be for office. Telecommuting, technology, wireless, higher speed Wi-Fi and cable that was all coming up. The lack of predictability for someone like me who looks for predictability was becoming less clear.

I am very confident in telling you that there’s a lot of predictability and demand for apartments and mobile home parks for the coming years. I’m using those because people would get it right away. People need a place to live. They either need a low-cost housing option or if you’re in Dallas and you have an apartment building in a good location, that’s probably not going to change. In retail and office, the predictability of demand was becoming much more questionable. Retail because more people are buying stuff online that was geared to be a trend that wasn’t going to slow down.

LUR 65 | Passive Investing

Passive Investing: If you’re not interested in networking, passive cashflow investing will be a tough thing for you.

 

I would tell you the same thing now. It’s very hard to predict. In fact, with COVID, with the acceleration of people now working online, that’s become even more questionable on the office side and with more people buying things online, that’s become more questionable on the retail side. If you’re looking for predictability, those are tough asset classes. Hotels also right now are very difficult with travel for the next few years but I see people looking at the hotel, retail, and office saying, “I can get a much better deal on these right now.” If you’re a contrarian, you may be able to go at a very nice price and potentially have more risks or lack of predictability but get more of a return potentially. For the right person, it’s the right type of deal. For someone like me who is looking for predictability, it’s not the right thing.

The top four asset classes for the coming years are the ones you’ve already spelled out, which are apartments, mobile home parks, self-storage and senior living. They’re all for different reasons. I don’t think any of them necessarily make sense for me this exact minute with my concern about the recession but for predictability of demand for the coming years, those are my tier A. Again, my strategy is about predictability. The next person may not be. It may be about profit or short-term flip or whatever else.

I want to pivot into talking a little bit about REITs. Could you talk about the decision to invest in a REIT versus investing in a syndication deal?

It’s interesting we’re talking about REITs right now because back in March 2020, when the stock market initially tanked, you can get into a REIT at a very favorable basis because REITs tend to be correlated to a degree with stock market pricing and the index. There are a lot of opportunities. I have with REITs. I’ve never invested with them but if you’re going to invest in a REIT, usually a good situation that you wouldn’t necessarily find in the real estate market because REITs are being pulled down by this other force that is unrelated potentially to the actual asset class. That’d be clear if you looked at all the different REITs in March 2020, some of them went down much more retail than others like self-storage. That’s not a coincidence.

People know that the predictability during the recession of self-storage, mobile home parks, and apartments is better than the predictability of retail or office but you still got relatively good deals. The publicly-traded REITs are great because there’s liquidity. You can go and sell your share now and you’ll have your cash in 2 or 3 days when it’s settled. There’s transparency in terms of what it’s worth. You can look at the price at any second and look at what it’s worth. You can’t do any of that in passive private investing. That being said, the biggest challenge I have with REITs is that people get salaries in REITs and they are like employees.

When I look at a deal in private deals, in syndications, there’s good alignment with the investors. The operator won’t make a lot of money unless there are profits to be split. With REITs, the REIT can lose a ton of money in a year, and yet there could be someone making a $1 million salary because that’s what the board approved. You’re not going to see that happen when you’re investing in a private deal. I much prefer the alignment of the private deals versus the publicly-traded REITs. The other thing I much prefer about the private deals is that I tend to invest in what’s considered non-institutional deals, meaning deals under $25 million that the big institutions the pension funds, etc. are not going after.

When you look at REITs, they buy institutional deals at $25 million or more on average. Those deals tend to happen at higher multiples which also means lower cap rates, which means that the cashflow and dividends will be lower. I am a cashflow investor. Every penny I’ve put in has got to be focused on cashflow and the cashflow that you would derive from REITs is going to be lower than when I can get from a syndication of the type that I target. It’s some of the reasons why it’s not a good fit for me but it could be a good fit for whoever is reading this blog.

Moving from there to JV investing. Doing JVs versus doing syndications, what are your insights?

I’ve done a little bit of joint-venturing where you’re maybe one or several partners. It’s not my preferred, so I’ve done it on small deals. I’ve done it on some hard money lending for single-family flips. I’ve done it on some single-family flips themselves but my preference is being in a larger pool of investors. The reason is because my strategy is to be truly hyper diversified. I have over 60 LLCs right now and I’d been in over 30 sales in the past few years alone. I love the concept of being diversified. I’m too diversified but I do this full-time so I can try and find the deals. If you’re going into a JV deal, you’re becoming either the only investor or one of a few investors.

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You’re not getting the benefit of being in syndication where you can put small pieces across a lot of things. You’re putting medium-sized pieces across less things. One of the benefits to me of being passive is that I can trade control for diversification as we talked about but I can’t get that same level of diversification in going to deals where I’m one of just a couple of partners. To be clear, there are benefits also to being in that situation. You may be able to have more control. You may know a couple of the other investors and now you know 100% of the ownership. You’ll be aligned with thoughts, voting, and everything. There are a lot of benefits to it, too. I will place the diversification above a lot of things as far as benefits to try to keep myself out of trouble and get more predictability in general.

It’s to value-add or not to value-add given the current landscape.

I don’t know that I have a different philosophy than other people about this but I’ve been taking what I thought was a very different strategy than most people until now. I tell people, “I’m a low-risk investor. I will do minor value-add or stabilized deals but I’ll do a minor or a medium value-add at the beginning of a cycle but not at the end of a cycle.” I did that in 2009, 2010, 2011, 2012 and then as of 2013, I started getting more skittish. The reason is because I look at it, you’re an airplane trying to take off. When there’s more runway, you can correct some problems. It’s maybe the steering is a little off or you notice the problem and you have to correct it for three seconds.

If you have a short amount of runaway, you’re investing in a building in 2006 or 2007, and you’re dependent on everything going perfectly, adding the value and refinancing or selling, you’re going to run out of runway potentially. One thing can make you so distracted, you run out of runway because there just wasn’t enough runway left. If I’m doing it at the right time, I can have more dominoes fall that are bad before I have hit the end of the runaway and correct things before I take off. Back in 2017, 2018, and 2019 when I was afraid we were getting towards the end of the cycle, I was pushing my sponsors to sell. What I was noticing is that most of the acquisitions I was seeing were more value-add.

The reason is because the returns were so low from an investor’s perspective on buying a stabilized thing. The sponsors or syndicators knew that wouldn’t be appealing and it didn’t make sense. What’s interesting from an investor’s perspective is that tells me that everything is overpriced. My concern is that almost every deal I saw was value-add but I was telling people, “I want to do value-add out at the end of a cycle.” What’s interesting is that value-add at the end of the cycle made the most sense for a syndicator but the least sense for an investor from a risk perspective. It made the most sense for a syndicator because it made a nice marketing package.

It made the least sense for an investor because they had the least amount of runaway available to them for a value-add deal. My long answer is that I haven’t done much value-add for the past few years but I will be getting back into it once we have this recession go through its thing and I see the price adjustment stuff. I’ll be more open to it. All that being said, it’s important to understand for whoever is reading, what is your risk tolerance? What makes the most sense for you? What box do you want to play in? I would tell people and caution people to adjust how they’re investing depending on where we are in the cycle.

That brings me to my two last questions here. The first is, being a full-time passive investor, which you mentioned, I even introduced you that way in your bio, insights for people who are reading. Most of them have full-time jobs and they’re thinking, “He is a full-time passive, cashflow investor.” What does that entail, the steps and the recommendation you would give to someone who aspires for that path?

I was lucky enough. I rode to now my money from stocks and bonds between 2002 and 2007. My goal was not even to get out of the corporate world from the cashflow. It was to have the paycheck and the cashflow. I had more predictability as a strategy on the retirement account side but I had the last straw moment with my manager and I decided to leave because I had enough cashflow built up to live off of at that point as a test. I see people in the corporate world all the time, you take a strategy to say, “I’m going to put X amount of dollars into passive cashflow each year. By year X, it could be 5, 10 out of the corporate world.”

I don’t want to sound like an infomercial but it changes your life. The freedom you have to do whatever you want. A stupid example but I was like, “July 4th is coming. I’m going to take off July 6 week.” I don’t have to ask anybody. That was the beginning and the end of it. Cashflow can really make a huge difference. I will tell you, our younger son was hospitalized for something similar to a virus that hit him. I wouldn’t say like the Coronavirus but he was on a ventilator for seven days. He had multiple surgeries and all kinds of problems. He’s in the ICU for a couple of weeks and in the hospital for a couple of months. I had to cashflow at that time and that was amazing because I cannot imagine what would happen if I’m sitting in the hospital day and night with my son for two months. I can’t imagine that I would’ve got paid for two months.

I may have gotten 2, 3, or 4 weeks using vacation time but then I probably would have been on a one-month unpaid leave. At what point are they saying, “We can’t wait for you anymore. We need someone to do your job.” You may lose your job over that. Cashflow can step in at times where you need it. It’s amazing. I would say that the number one thing I would tell people is if you’re not interested in networking or don’t have much interest in networking, passive cashflow investing is going to be a tough thing for you unless you’re willing to go on crowdfunding sites, go with an intermediary, and look at it from that perspective. The irony is that as a full-time passive cashflow investor, I’ve never invested in a crowdfunding deal ever even though I’m an advisor for RealtyMogul.

That is because I have time to find the deals directly and I want to get that additional return for that same level of risk. Networking is such a key thing and to capitalists, because it’s so hard to find deals. You have to network to find them. If you don’t like doing that, you’re going to have a hard time with it. I consider my biggest challenge everyday is finding deals and networking. It’s how I solve that problem. If you’re not interested in that, this is not going to be a good thing for you. That’s the biggest piece of feedback I would give somebody. I would also tell somebody that it’s totally doable. I’ve seen many people get out of the corporate world over years with a strategic plan.

I love watching that happen because I know it changes people’s lives but it’s not something that happens overnight. In fact, if Lisa you said to me, “I got $2 million in cash. I want 8% return from it. I need $160,000 a year. I am done. I can live off of that. I’m ready to go,” and you’re working right now in the corporate world. My answer to you, first of all, I wouldn’t even think of investing most of that until next year and see where pricing goes. Second of all, from that point, you want to be diversified across X number of opportunities.

How long will it take you to find those opportunities if you’re being careful and picky? Probably a couple of years, at least. Even if you had the cash ready to go, this is a multi-year type of initiative. If you don’t, it’s a multi-multi-year initiative. It’s a slow and steady approach. That’s the reality of it as opposed to what someone may pitch you as a sales pitch. If you take the slow, steady approach, have a plan, and are very focused on it, I have seen many times people execute and get out of the corporate world and I love it because cashflow really changes your life and gives you a lot more flexibility.

I’m going to jump right into my level-up questions. My level of questions is what I asked all of my guests. The first one is, what are you grateful for in your life right now?

We’re in the middle of COVID. I’m grateful for many things, including the fact that I live with my family. I’m very grateful for the fact that people deliver food to us right now. The delivery people deserve a lot more credit or at least a ton of credit. I know more or less than what people are giving them. From my perspective, when I order from Instacart and somebody is walking into a grocery store, I’m not comfortable walking into it because my son has all these pre-existing conditions that we have to be very careful with. I’ve got someone else for a relatively small fee. To say they’re risking their life is maybe a little much but it’s not that far off from that going in and getting food for us. I’m hugely grateful that it exists right now because if it didn’t, I would be increasing the risk of my son potentially ending up in a very bad spot. I’m very thankful for that at the moment.

What has attributed to your success and continuous growth?

Persistence is an important thing. It’s what I try to hammer home with my two kids. It’s funny because we talked a lot about a lot of things. One thing I mentioned is I started investing in 2002. I went to two networking meetings a week from years in LA to be able to build up a network. I didn’t have kids. It was a different time. I was younger. There are a lot of challenges in life that may or may not make that possible for people. The point is, I don’t think I would have got to where I am now without that persistence and keeping at it even with the 4 or 5 investors who we launched those public networking meetings.

The first meeting I had was at a Starbucks with three other people. Now, we have over 30,000 registered people or users. We have much more than I think. I haven’t checked it in a couple of years but the point is the difference between where we’ve gotten to with that versus where some other people don’t get to is a question of persistence because they don’t want to deal with the fact that their fifth meeting has eight people at it. That’s not what they envisioned. To me, slow, steady and persistence make a huge difference in life. That’s an important thing to keep in mind.

My last question is, what do you now know that you wish you knew at the beginning of your journey?

I would say two things. One is to start as early as possible. I started when I was 28. That’s not so bad in retrospect. Earlier would have been even better. I had a call with somebody who reached out to me. He listened to me on a podcast. He was eighteen, about to go into college, and literally had called me and said, “I love this concept. I love real estate. Which courses should I take? What should I focus on?” He was that dedicated to it. I love it because he’s going to come out of school with so much more education and knowledge than most of the people his age. He is going to get on this good path at that young age and he’s going to have an advantage over everybody else because of time, let alone everything else.

Earlier is better. That’s number one. I have the same rule. I’m invested in a handful of startups as well. That’s a very small portion of what I do but that may be in ten. The number one rule with those startups and these real estate investments is who you’re making the bet on. When I was much younger, I used to get caught up in concepts and invest in a startup. That’s not a great idea. I didn’t know the people and then it would go to zero because it wasn’t the right person to make a bet on. I liken the syndication to that the same thing. You’ve got to understand who you’re making a bet on. When I first started in syndications, I would definitely focus more on the property. It’s been a long time since I learned this but focusing on who you’re making a bet on is number one. It’s absolutely key when you’re giving someone else your money and you’re not keeping control.

That was so good. Thank you so much for coming to the show. There is so much valuable content here. I appreciate it. If my audience wants to learn more about you, how can they go about doing so?

Thanks again for having me on it. Hopefully, it will help some people. If anyone wants to reach out to me for any reason, you’re brand new, you’re curious to learn more if there’s any way I can help you. If you’re an experienced investor who wants to network, you’re another investor group and you want to network with my group, you are an operator who has deals or whoever it is, I’m happy to take anyone’s emails. The best way to reach me is my email, which is JRoll@RollInvestments.com. If I can help you in any way, feel free to reach out.

Thank you again.

Thank you so much for having me. Hopefully, everybody out there is safe.

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About Jeremy Roll

LUR 65 | Passive InvestingJeremy started investing in real estate and businesses in 2002 and left the corporate world in 2007 to become a full-time passive cash flow investor. He is currently an investor in more than 60 opportunities across more than $1 Billion worth of real estate and business assets.

As Founder and President of Roll Investment Group, Jeremy manages a group of over 1,500 investors who seek passive/managed cash flowing investments in real estate and businesses.

Jeremy is also the co-Founder of For Investors By Investors (FIBI), a non-profit organization that was launched in 2007 with the goal of facilitating networking and learning among real estate investors in a strict no sales pitch environment. FIBI is now the largest group of public real estate investor meetings in California with over 30,000 members.

Jeremy has an MBA from The Wharton School, is a licensed California Real Estate Broker (for investing purposes only), and is an Advisor for Realty Mogul, the largest real estate crowdfunding website in the US.

Jeremy welcomes e-mails (jroll@rollinvestments.com) to network with or help other investors and to discuss real estate or business investments of any size.

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