The School Of Cash Flow

It’s good to have a low-risk mindset when it comes to investing. Not everything has to be high-risk and active. This is what Jeremy Roll, the President of the Roll Investment Group, does when it comes to low-risk passive cash flow. Join Dale Corpus as he sits down with Jeremy to discuss various things – from networking, diversification, and the best real estate asset classes on the market today. Learn how the low-risk mindset just works for him on what he does. So grab your spreadsheets and get ready to learn a thing or two about cashflow.

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Jeremy Roll On Investing With Low-Risk Passive Cashflow

Real estate investing is a long-term play. It’s not a get-rich-quick scheme. If you’re trying to get rich fast with real estate investing, it might not be the right vehicle for you. Patience in this business is key. Time is on your side. It’s your friend in real estate investing, as the compounding effects of the growth of your real estate investment portfolio are what will eventually snowball into massive growth. I like investing in passive real estate syndications when it comes to real estate investing. I don’t necessarily have all the time to be an active investor managing the day-to-day of investing as I’m a productive realtor running my real estate sales business and managing my sales team.

I know many of you reading have your businesses or W-2 tech jobs and you’re busy doing that. The cool thing with passive real estate investing is that you can truly do it on the side without a lot of heavy lifting. I love that I could continue selling real estate because I have a passion for it. I love continuing to grow my real estate investment portfolio through syndications. You don’t need to give up your day job if you don’t want to invest in real estate.

My guest is no stranger to the world of passive cashflow investing. He has been doing it since the early 2000s. I’m excited to have him on this episode. His name is Jeremy Roll. He started investing in real estate and businesses in 2002 and left the corporate world in 2007 to become a full-time cashflow 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, he manages a group of over 1,500 investors who seek passive managed cashflow investments in real estate and businesses. Jeremy is also the CoFounder of For Investors By Investors also known as FIBI. This nonprofit organization was launched in 2007 to facilitate, network and learning among real estate investors in a strict no sales pitch environment. FIBI is the largest public real estate investor group meeting in California with over 30,000 members. Let’s jump right into this. Welcome to the show, Jeremy. How are you?

I’m good. Thanks for having me. I appreciate it. I have a broker’s license, but I’ve never used it for anything but investing. I’ve never done anything retail.

For my readers who don’t know you yet, where are you based out of geographically?

I live in Los Angeles. I’m a few blocks South of Beverly Hills.

Tell me more about yourself, perhaps that the bio doesn’t cover. How did you get into real estate? What were you doing even in your corporate job prior to real estate?

I come from the corporate world, although it’s been a while since I’ve been in it. I went down a typical corporate path. I have many years of business experience. In my last two jobs, to give you an idea, I was at Toyota headquarters in Los Angeles from 2006 to 2007. I was at Disney headquarters prior to that between 2002 and 2006. I was mostly in marketing and a little bit in finance. I have an MBA from the Wharton School, the University of Pennsylvania. I’m from Montreal. I spent about half of my life growing up and living in Montreal and then half of my life here in the US, most of it in LA.

I started investing in real estate and passive cashflow opportunities in 2002 due to the dot-com crash. The reason is that after the dot-com crash, I’m a low-risk, slow and steady, more predictability type guy. When I saw all the volatility and lack of predictability in the stock market after the dot-com crash, I said, “This is not a good strategy for my long-term retirement.” To your point, this is a long-term game. That’s very important. Without having that predictability, I was like, “I got to find a different way to do this. I don’t know what my retirement is going to look like in years.”

I concluded that focusing on lower-risk passive cashflow opportunities was a better fit for me because of that predictability aspect. I rotated all my money from stocks and bonds into cashflow between 2002 and 2007. I had a last straw moment in the corporate world. When I left the corporate world, I wasn’t planning to in 2007, but I had the cashflow built up. I’ve been a full-time passive cashflow investor for years, but have been doing passive cashflow investing for many years.

How did you first learn about these alternative investments and syndications and whatnot? I didn’t know about them until 2010, but you were already connected to this in the early 2000s.

It was interesting because when I started looking at different ways to invest, I approached a lifelong friend of mine from Montreal whose family, including him, had been investing in real estate for many years and had a lot of experience. I started to learn about what they were doing. Funny enough, they were syndicating. Meaning they were taking on a group of investors the way that I invest now. I was lucky because I got to learn from them. I did my first few deals with them, but I was able to go onsite on deals, get much more detailed than a normal investor would get and understand things better.

Eventually, what I did was once I started to like what I saw and thought it was a good fit for me personally, I started going to a lot of local meetings in LA. There are a lot of meetings around town in a big city like LA that is real estate-based. Some of them are sales pitches, some aren’t, which is why we started For Investors By Investors because of all the sales pitches. I was trying to avoid going to those. Regardless of sales pitch or not, there is always good networking and hundreds of people that go to somebody. It was very popular between 2002 and 2007 when I was doing that.

The landscape has changed. Now, you can listen to podcasts, go to conferences and do stuff virtually. It’s different, but that’s back then. I grew the network in my understanding by attending a lot of in-person meetings, learning about different asset classes, networking with other people and networking is the key to finding opportunities in the space for the most part. Some of them are allowed to be publicly marketed and most of them still are not. Networking is key to expanding your horizon in this type of investing.

Was it always your goal to leave your corporate job when you started investing in 2002? I know you left your corporate job in 2007 but was that even on the top of your mind?

No. I talked to a lot of people who say to me, “I want to get out of the corporate world in 5 or 10 years. How do I do it?” We go through it. I’m not a financial advisor or anything like that. I’m an investor. I take them through the steps the way I see the path. I wanted to have the paycheck and the more predictable cashflow on the retirement account side. I intended to do the corporate job for a long time, but I had a last straw moment with my manager at Toyota in the corporate world.

Because I had enough cashflow coverage built up to live off, I decided to take a risk and leave the corporate world, but it was completely non-planned. I did it only because I had about two X coverage of the cost of living versus cashflow. I decided to take that risk and I’m a very low-risk guy. I was very comfortable with the risks given the cashflow coverage, but it was not planned.

I know you invest in both cashflow real estate opportunities and business opportunities. I know my folks that are reading are in real estate, but on the business side, what business opportunities have you invested in and you like investing in?

The underlying theme for me is I like to invest in more predictable low-risk cashflow and preferably asset-based predictable low-risk cashflow. Real estate is a great asset-based type of investment, typically depending on what it is. That’s one of my favorites. Sometimes I will make business investments where the assets aren’t necessarily as obvious. The cashflow has got to be higher to compensate for the risk or at least the payback period has to be quicker. There has to be something to compensate for the lack of the asset basis in that risk.

Low Risk Investing: Grow your network and understanding of asset classes by attending in-person meetings. Networking is the key to finding opportunities in real estate.

One easy example for me, I’ve been investing in ETFs since 2008 and have had a lot of success. It’s been many years that I’ve been investing in them. You’re getting a profit split of a surcharge whenever someone goes to use a little third-party ATM at Joe’s Liquor store where that machine for $3 or $4 with a surcharge, maybe $2.50 or $2 in New York. I’ll get a portion of that profit.

The profitability would be very high, the payback theory. It’s a different equation in real estate. I’m a huge fan of diversification, even in the specific asset, let alone across assets. I’ve diversified into other assets over the years. Some of them are business assets as well. I can give you other examples too, but that’s the easiest one that comes to mind.

What does it mean to be a full-time passive cashflow investor? Does it mean that you’re sitting around collecting checks and ACH deposits or are you actively doing other stuff?

I guess it depends on your personality. I’m a very [0:09:30] personality and I work more than I did in the corporate world. The part of the reason is that after a certain amount of time, what happens is that if you’re going into, let’s say a 5 or 10-year deal when you’re 5 or 10 years into it and you’ve deployed all your capital, hopefully. Now things are exiting and you’re having to find new things because I took the strategy of being hyper diversified, which I frankly don’t recommend for anybody. I’m in over 60 different LLCs and it’s a lot. I love diversification.

That makes it even more challenging for someone like me because I always have things coming up. I can give you examples and I have one thing cashing out in a week, a self-storage facility. I had several hard money loans that cashed out. I’ve had quarterly payments come from a ton of stuff because most of the stuff I get is quarterly and I have to redeploy that capital. The worst thing that I could do as an investor is my money sitting cash. We all understand well that you’re at risk of inflation. Even in normal times, let alone what’s happening of having your money value degrade over time.

I am constantly under pressure to find stuff to reinvest and to keep the cashflow stream going, so I don’t have to go back to the corporate world to snowball and grow it bigger, to compound it and to not have it sit in an account and be at the risk of disinflation in terms of what it’s worth. I worked hard. It’s honestly not easy, even though all the work I do is upfront. I don’t work on an opportunity once I invest in it. That’s where the operator takes over once they close on the property and then I’m reviewing the quarterly reports, making sure I’m getting the checks and everything looks okay.

All my work is upfront and signing the opportunities. If you’re picky like me and you try to weed through a ton of stuff, finding the opportunity is the number one thing I focus on all day long. It’s hard. You have to build a big network. It takes a lot of time. You have to do a ton of networking to find most of the opportunities that are not allowed to be publicly marketed per the SEC.

I find it very interesting that you say that you’re busier than working your corporate job. If I were to dissect your day, what do you do from day to day? How do you stay productive? What is your time spent? People would want to know.

My day is very structured and scheduled in a very specific way. The first thing to know about me is that to avoid a lot of the pitfalls and landmines that might come up. I have to constantly think ahead because I go into a lot of ten-year deals. You can imagine, I am under the pressure of figuring out where technology is going to be and what trends will happen in 5 to 10 years. If I invest in an asset now, hopefully, it will minimize the risk that it won’t be out of favor in ten years. It might be worthless.

A great example is online and retail. If you invested in a Best Buy, Circuit City retail strip center in 2013, you have to sell it in 2023. You’ve got a big problem. You have to fill it in. You probably left and didn’t have cashflow. I read about 2 to 3 hours of news a day, trying to sort out what’s going on in the economy. What’s going on, not just what the media is telling us, where the trends are going and everything else. That’s one thing that I do. I do a lot of that when I first wake up and late at night.

I do it in bits and pieces throughout the day, but most of it is in the beginning and end of the night. I usually schedule my first calls for either 11:00 or 12:00 to give myself enough time to get a lot of reading and reply to some emails in the morning. I’m on schedule. My call is typically between 11:00 and upwards of 2:00, 3:00 or 4:00 straight every day. Those are all networking calls. That’s all it is. It could be me talking to another investor to network or exchange ideas. It could be me talking to another investor group to see what’s going on and exchange ideas or talk about deals. It could be me talking to a sponsor and discussing a specific deal, but I’m constantly networking all day long to have the type of network that I need to have to find enough opportunities.

Once those scheduled calls are done, I work from 4:00 to 6:00 on emails and follow-ups. Some of that could be even reviewing opportunities at that time of day because that’s my first window to do it, to look at these large documents. I’m with my kids from 6:00 to 7:30 and then from 7:30 to 10:00. I’m continuing to do work, whether it’s looking at opportunities, replying to emails or preparing for the next day. It’s the same thing every day for me.

One of the things that jumped out in here looking at a lot of deals is, can I ask you how many deals you’re typically juggling and looking at even on a weekly or daily basis?

It’s 2021 and it’s a very interesting time because of the ongoing pandemic, other factors and inflation. What’s happened is that the deal flow is slower than 2019, pre-pandemic, but there is still a lot of it going on. I have done that I’ve been psychologically on the sidelines since the end of 2016 because of high asset prices. I pushed my sponsors as much as I could to sell between 2017 and 2021. I’m waiting to see if there is going to be some type of asset price or market adjustment. I’m not open-minded to a lot of traditional opportunities. A lot of the pricing and the cap rates are not the right fit for me.

I want to say that because I can weed through a deal quickly compared to a normal time and cycle. I couldn’t tell you how many deals I’m seeing in a given week because I’ve never even thought about it, honestly. Every day is different. It could even be me hearing about a deal on the phone. I heard one on the phone, but then I said, “That’s not for me. I’m not going to look at the docs.” I got another one through the email. There is so much stuff going on for me. It’s partially because I have all these balls up in the air with the amount of opportunities I’m in. Honestly, I’ve created a bit of a monster for myself, but I love the diversification.

Going back to when you first got started in this space, what was your first real estate investment? Was it a syndication?

It was a syndication back in 2002. It was either office retail or industrial because that sponsor I mentioned that I started testing with did those three. It’s not the first time I’ve been asked that question. I got to ask them. It was one of those three, which is funny because I’m not looking at any of those asset classes. It was one of those. It was not like apartments or anything like that, which a lot of people tend to get started with.

I guess most people seem to startup with multifamily. I was assuming that you were going to be saying multifamily as well, but it was something different.

Multifamily has become the number one asset class. Probably about 80% to 90% of deals I see are multifamily during the pandemic. That’s for a lot of different reasons, but it was a more diversified pool of opportunities back between 2009 and 2018. This whole multifamily trend has been very concentrated.

I’ve been noticing that myself, too. Speaking of multifamily, what are your thoughts on multifamily now or in the next 5 to 10-year horizon?

One of my four favorite asset classes for the next years when you’re thinking further out is multifamily in the right locations. Everyone is always going to have a place to live. If you’re choosing the right location, demographics and job growth, you’re probably going to be okay. Putting weather aside and other potential factors. The challenge for me is the current pricing of multifamily. That’s just not a multifamily thing for me. It is in every asset class for me, which is why I’m mostly on the sidelines. You and I invested in a deal in 2021 that was very unique multifamily.

I’m open to unique situations because you always have to be and sometimes they’re out there. We invested in a tax abatement structure multifamily. They gave us about 150 basis points, padding and closing compared to what it was purchased at. All of a sudden, we have this padding in case the price is adjusted and that didn’t make sense to me. Generally, multifamily is very tough for me for two reasons why, one is the pricing.

Low Risk Investing: If you have very little money to invest and are not accredited, you can invest in crowdfunding. There are a lot of different crowdfunding platforms and you can invest as little as $500 or $5,000 to start.

Two is because a lot of the deals are doing 3 plus 1 plus 1 loan, which are bridge loan styles in to do heavy value add the type of push on the property. I don’t generally invest in heavy value add, to begin with, just from a profile perspective, nothing wrong with it. It’s not what I do. Even more so, I don’t do it at the end of the cycle. I’ll consider it at the beginning of a cycle. In my opinion, we’re at/or near the end of a cycle. It’s the wrong timing for me for that, too.

Do you do any active real estate investing or is everything passive?

Everything is passive that I’ve ever done. The closest I am to active is I do hard money lending, but I do it through a broker and I am on first position loan on the title of that property when I do it. I don’t manage. I just sign a document. They take my money and do the whole thing. Everything I do is passive. I started that way in 2002 because I was so busy at my job at Disney. I didn’t have time to be active. What I’ve learned over time is that it’s the right personality fit for me, which is a big piece of that active versus passive comes down to personality.

For folks starting off in this space potentially, is it necessary for them to have a lot of money already? Can they even get involved in syndication investing if they don’t have much money?

You have to bifurcate this between accredited and non-accredited investors. A lot of people think, “Are you accredited? It’s like part of a club. We have to join something.” Accredited is a definition by the SEC of income or net worth requirement. To clarify it and again, I’m telling you what I remember. I’m not an investment advisor. If you’re single and file your taxes single, you have to make at least $200,000 for the last two years and expect to make $200,000 this coming year. If you’re married and filing joint, you have made at least $300,000 for the last two years and expect to make $300,000 joint in the next year or you have to have $1 million net worth or more excluding the value of your primary residence.

If you’re accredited, you have a lot more access to opportunities. If you’re not accredited and don’t meet those requirements, it is much harder to invest, especially at the end of a cycle because there are so many money-chasing deals that the sponsors don’t need to take non-accredited investors. They’re going to have a lot of demand from accredited investors. If you have very little money to invest, even if you’re accredited, some of the better ways to invest, which are more things that have come up, are crowdfunding.

The full disclaimer is I’m an advisor for RealtyMogul, one of the larger crowdfunding websites. I haven’t done much for the last few years, but I’ve been with them since before they launched in 2012. I mentioned this not for RealtyMogul because I’m not speaking on behalf of them. In general, you can go on to the RealtyMoguls of the world, a lot of different crowdfunding platforms and invest as little as $500 or $5,000 to start even in some real estate deals or funds and even if you’re not accredited. If you’re not accredited, that is the number one way or route that I suggest people to look at because there aren’t that many alternatives.

If you are accredited and have more money, you should expect minimum investments for a typical accredited investor deal to be about $50,000. That could revert to $25,000 if and when we have a downturn and it’s harder to raise funds for the sponsors. You’re taking on additional risks when you’re passive because you’re giving control to somebody. I would strongly recommend if you’re going to be going into these deals that you have multiple $50,000 chunks diversified across multiple asset classes, geographies and operators. I wouldn’t tell you to take your $150,000 chunk and put it into one deal. Maybe then you want to take a look at crowdfunding and spread it across a bunch of sites or maybe wait. I’m one person’s opinion, but I like to be diversified.

Nowadays, we’re spoiled in the fact that shows such as this are available for people to learn. When you started back in 2002, how did you even learn about all of this stuff and feel comfortable? What were you doing whether mentorships? Did you have mentors yourself? I want to know how that works.

I did not have mentors. I probably should have, but I didn’t. The way that I learned was in two ways. One is I went to a ton of in-person meetings. I was able to leverage the fact that I was in LA and there were a ton of meetings. I’d go to an average of 2 to 3 meetings a week. In 2007, when I Co-Founded For Investors By Investors, we had our meetings. I’d go to other meetings and manage my own meetings for additional networking, sharing and learning with people, which was great. I did a ton of that between 2002 and 2011.

When I had my second child late in 2010, that’s where it started getting more difficult for me to do that on a very regular basis. One way that I learned a lot was not just listening and going to listen to panel discussions about a certain asset class or various asset classes. I learned a ton going in-person and listening to what the sponsors were doing and how they worked and all different types of topics over time. I also learned a lot about what I call opportunity exposure. It’s one thing to learn how self-storage works if I don’t even know how it works? You can learn that through watching panels or speakers.

How do you know if you’re getting a fair or not fair investor return split and fees and management fees? That I learned through what I call opportunity exposure, which is much easier to do now with the crowdfunding sites, you can log on and download twenty multifamily deals, put them all next to each other on a table and compare them all. You can say, “This deal is giving me a 6% preferred return. This one’s giving me a 10% preferred return. Why is this one so much better? Are there more fees? What’s the difference?” You can compare them, which is a fantastic thing. I did a ton of opportunity exposure and comparison to learn the different splits and everything else that I should be looking out for over time. In the end, it’s an experience, but it’s going out there and proactively trying to learn that way. That’s how I learned.

What opportunities are you seeing in the passive real estate investing space, perhaps with asset classes or anything you want to chat about?

Real estate is tough, at least for me. I’m the guy that is not comfortable with going into a multifamily deal on the premise that it could go down in price if we have an adjustment in the next few years, but if you’re in a ten-year loan, you’ll eventually make that backup, which is probably accurate. It probably will end up fine in a ten-year period. I don’t like watching it go down and having got it at the wrong time. I’d rather wait it out. Some people are not like that. Everyone’s personality is different.

For me, real estate is tough. I’ve been doing as you and I have done together, some that are very hard to find. Tax abatement apartment deals and low-income housing tax credit apartment deals, both are purely for mitigation of downside risk if an asset class is changed. It’s not because they’re giving me these crazy outsize returns, although they do have good returns. It’s more for me about the downside risk mitigation of what might be coming up, mobile home parks, which is one of my four favorite asset classes within the next years. Those cap rates are crazy tough.

I’ve been investing in mobile home parks since 2009 or 2010. I’ve watched the cap rates go from 10% to 13% to the current 5% or 4.5%, which is crazy to me. I’m on the sidelines with that. Specifically, I haven’t found much that’s unique in that asset class unless you’re willing to take much more risk, which I’m not. I am planning on going back into those big time if and when we have an adjustment. I’m going to wait and see what happens. Self-storage, again, cap rates are too low for me, but I love that asset class in the long term.

I exited one of the self-storage investments that I have and was very happy about it because we got a crazy low cap rate and I’m waiting to see if stuff will adjust. I love that in the right location for the next years. Senior living, I love the upcoming demographic of that generation. It tells us there is going to be a huge pickup in about 2023, statistically. I’ve been looking at that asset class for years. It’s very challenging for someone like me to invest in it because the vast majority of deals and so much future demand is all development we need.

We need the extra units. I’ve never invested in a development deal. I invest for cashflow. Finding a stabilizer minor value-add senior living facility is very difficult and I continue to look. Senior living with the pandemic continuing is also having its challenges for sure. I’m in several deals and some have done better than others with COVID. None of them is a disaster, but some of them have to pivot. It’s been very tough.

Industrial is very much in favor now. It’s tough for someone like me because I like diversification. If you’re looking at a single-tenant building or a 2 or 3 tenant building, it’s very tough for me to do because there isn’t enough tenant diversification. That appears to be a very strong and good long-term play if you’re okay with the current cap rates. Hotels are not for me because the average daily rate changes every day. The predictability isn’t there. Although there is an argument to be made that if you find a reduced hotel deal, it’s a very interesting timing with the likelihood of travel picking up overtime.

Retail and office, the predictability of those asset classes are still very uncertain, so that’s tough for me. Things have been trending online, the pandemic accelerated. It’s very unclear if we have a surplus of retail inventory going forward or not. It’s the same thing with working from home. That stuff hasn’t sorted itself out yet. For someone like me, with uncertainty, I tend to wait. I have a number of offices in retail and industrial investments from years ago that I still have, but I’m not looking at any of those. Frankly, every single one to me is overpriced and that’s a problem across the board.

That’s my quick run-through of real estate. I’ve done on more real estate, though. I did two and a half times more hard money lending, which is first position loans to single-family flippers, in 2021. The supply and demand imbalance was hugely in favor of investors, whether it was very little housing supply and the prices went up a lot. I did a ton of that. I’m trying to assess whether I’m going to continue to do a lot of that in the next years or a normal amount. I’m trying to figure out where we are in supply and demand going forward because interest rates are likely going to go up in 2022. It’s a tough equation for that, too. Real estate is tough for me and I’m waiting it out.

On the flip side, if I were to ask you the same question on cashflow types of investments that were none real estate related more so on the business side, other than the ATM types of funds, is there anything else you see opportunity in?

One of the things I have been doing is figuring out what the hell to do while I’m waiting. There have been three buckets I focused on. We’ve touched upon a couple of those, but I’ll make it a little clearer. One is short-term stuff where the risk-reward is good. Hard money lending was a good example in 2020. Two are unique opportunities where the pricing is so unique or there is some downside risk mitigation that I’m comfortable moving forward. Tax abatement multifamily deals are a great example of that.

Three is opportunities where I don’t have to worry about asset prices decreasing, even if we have a downturn or an adjustment because they’re going to decrease anyway. A great example of that is ATMs, a computer, a case, and a screen. We know what’s going to be zero. That’s what computer equipment does. Whether that happens more quickly or not, I could care less. I care about the predictability of the transactions at the ATM machine generating my cash flow.

I’ve been looking at opportunities like that, where I don’t have to worry about an asset price decrease. If I think it’s going to do well enough during a downturn and continue its cashflow, then that’s been good too. ATM is a good example. I’m not this guy at all. I don’t know where crypto is going and I won’t speculate on it, but I did invest in a Bitcoin mining fund that’s meant to distribute cashflow. I did it because another great downside risk mitigator is how do you get exposure to Bitcoin if you’re a low-risk guy like me, even if you think that it might go down?

The Bitcoin mining fund I invested in has a cost per coin of about $8,900. We’re at $60,000 or $55,000. Even if Bitcoin goes in half, I would’ve lost half of my money if I bought it. Here, we’re making money. There are also appreciation benefits. That is something I discuss a lot because I don’t consider it low-risk. The payback is projected to be about a year. It’s a very quick payback, too. I mentioned earlier that stuff I’ve been looking at has a quicker payback because of reduced risk in case there is a downturn or an adjustment in the markets.

That to me is more like, “How do I get exposure to that in case I’m wrong about crypto?” I have some downside protection in case crypto goes down. I still make money unless it goes down to very low numbers. I’m always looking at other things, too. I have a handful of startups that’s a 1% of what I do. I always look at those, but only with people. I know well that I have to make a bet on that random. I’ve done a little bit of debt validation, which is similar to debt consolidation or again, it performs well. It even does better during downturns when people need that service more.

In the past, something else has done well during downturns and that’s real estate. Aside from lower, more affordable housing like mobile home parks that become more in demand even during a downturn when people have to downsize and reduce their spend is student housing. I did a little bit of that in the last downturn in ’08, ’09 and ’10. During that downturn, it did extremely well because people go back to school when there is a recession because they can’t get a job. That’s a great time to go back to school. With what’s going on with remote learning and the student debt, that’s a little less clear, but that is another thing to potentially look at for a downturn.

What was your biggest mistake in real estate investing so far? What lessons did you learn from it?

When I first started working at Disney headquarters, I came from the corporate world, and I had to present to upper-level management. It would be a polished presentation. I would double and triple-check it right. A lot was on the line each time I presented. What I did is I went in with these preconceived notions in 2002 that if the documents and presentation I got about an opportunity weren’t polished and professional up to high-level standards, I probably would pass on it.

Low Risk Investing: Focus on low-risk like investing in a brand new high-tech airplane. If one engine goes out, there’s still another one. Don’t invest in an old airplane where one domino could fall and you’re done.

What I’ve learned over time is that I’d rather invest with the best operator, with the best execution, with the worst documents than the worst operator with the worst execution, with the best documents. I learned to adjust to my preconceived notion about documents and how they look and more to dig into the experience and the deal because some of these sponsors have nicer packages than others. Frankly, it’s a lot of them hate dealing with investors and we’re a distraction to them.

They want to go buy a property and operate. That’s what they like to do. The fact that they even have to get investors is an annoyance because they’d rather buy and do it. We’re a piece of the puzzle they need, but that’s not what they want to focus on. That’s one thing I adjusted over time that I thought was very important.

For as long as you’ve been investing, can I ask you what your worst investment was? I’m curious to see if you lost money and what it was like.

First of all, when I was investing in startups back in the 2000s, I was younger, I would find this great idea like, “This is a great idea. I got to invest in. It’s going to be good.” I didn’t know the people very well. It went to zero and I’ve had a few of those that it went to zero. What I learned, which is the same thing I’ve been applying to my real estate investing since day one, ironically, is that it’s all who you’re making a bet on, which is the last point I made as well. I applied that to my startup investing and as soon as I switched that years ago, it changed the success of my startups 180 degrees.

That was a huge learning. Several of my initial stock investments went right to zero. That’s the worst you can do. No cashflow, go to zero. I was in some accounts receivable financing in 2008 and 2009 when we had the downturn. That lost about 20% or 30% because that company could not get past that. That’s not real estate and that’s not low risk, but that’s probably one of my worst performances as well. I had a couple of housing flip funds breakeven around 2013 to 2015 because we had a partner dispute. There were three partners, two, which I knew well that I wanted to make a bet on. One of which was the back office guy I didn’t know very well.

They had a dispute and the two important guys for the execution left. We were left with this guy I didn’t know and didn’t know what he was doing in executing flips. I came in and helped negotiate him leaving in exchange for giving us the assets. I brought in a more professional operator and then we ended up breaking even because he had mismanaged some of it. A breakeven doesn’t sound so bad, but when you’ve got money up for five years and you’re getting the same money back and you’ve got inflation, it’s not a great result for an investor. That’s another example. I’ve been in one foreclosure my entire year. It was a fascinating story. I didn’t lose any money off of it, which is crazy.

That was a student housing apartment that I was in. A 300-unit apartment in Michigan. I tell everybody that because I focus on the lower risk spectrum, picture me making a bet on a brand new airplane, with the latest technology with redundancy and all these redundant systems where like you don’t crash because one domino falls. One engine goes out. There is another engine. You don’t crash because one computer goes down. It’s got to be like four dominoes in a row that fall until you crash.

If you invest in an old airplane that’s 40 years old, one domino could fall and you’re done. It’s the reality. I have an advantage that because of the risk profile I’m investing in, if you’re going into a 100% occupied building with a diversified tenant base with a great sponsor, four dominoes have to fall. It’s not one typically. This was a case where five dominoes fell in a row perfectly to get to foreclosure. I invested in a student housing, 303-unit apartment building in January of 2008, under the thesis that there was going to be a downturn and then it was a counter-cyclical downturn. It’s exactly what I mentioned, where people go back to school and it worked out perfectly.

It was 100% occupied when we bought it. It was 100% occupied every year except in 2012. Part of the reason why the deal was unusually good is that we assumed a loan. It was coming up in four years. We got favorable pricing as a result of it. This is a very experienced student housing sponsor. They owned seventeen other properties and knew what they were doing. Long story short, they managed everything well, 100% occupied, plus or minus. It was the first property across from a state university and there was a bridge that people had to walk or drive over to get to the property.

In January or February of 2012, the city sends a letter to all individual tenants and owners saying, “We have to close the bridge for construction during the summer months because it has to be repaved. Don’t worry. It’s going to be open in time for the school season for the fall.” What happened? We go from 100% occupied to about 60% or 65% occupied because the students were nervous the bridge wouldn’t be open in time for them to go to school. That was domino number one. Domino number two, we had a loan due of all the years that fall. That was a very bad coincidence and luck.

Domino number three, there was still some carnage from the 2009 downturn at that time. This particular bank wasn’t willing to extend the loan for a year because we were going to go back to 100% occupied once the bridge was open the year after and everything was fine. We would’ve been about a breakeven. We were too low as far as the debt coverage ratio, but we were about breakeven on the property. For whatever reason, the bank would not extend the loan. They wanted the property, which is unusual because they saw the opportunity to get it.

We couldn’t negotiate that. Foreclosure happened. The amazing thing that goes back to who you’re making a bet on is that the sponsors I had made a bet on own most of their properties themselves without other investors and were very wealthy. We got foreclosed. They had a partial recourse loan that they lost a lot of money on. They came to investors unsolicited and said, “We feel bad. We’re going to transfer your equity from this property to another property we own ourselves, which is the first property across from the state university campus in Texas.”

The transition took a year where there was no cashflow. There was all this legal stuff they were working through. A year later, I started getting cashflow again from the new property and I’m still in that property now. The only foreclose I’ve ever been in was this multiple domino thing, which makes sense because that’s what’s required to happen. In any deal, I can tell you twenty ways it can go. There is always a 1% risk like all of them. You can have a fire and insurance doesn’t pay. You have to sue them for five years.

You have to cash call for that and then during that time, you get foreclosed. I could tell you, there is always a 1% risk of happening. This is what I would call a 1% risk because you can never go to 0% risk. It was a great lesson in many ways, but I’m very lucky who I made a bet on. I’m still cashflowing and it wasn’t a loss for me at that point.

Going back to the importance of knowing and trusting that sponsor, I know that you probably go back to the same sponsors and operators. Do you have a specific betting process for them?

The first thing I’ll say is that I’m not going to make a bet on someone brand new. I’m going to be honest with this and it’s not going to sound good, but I don’t want people to learn off my money. People can learn off other people’s money aside from mine. My comfort level, for whatever reason, is like someone’s done 5 to 7 deals, preferably seven deals, I’ll start to seriously consider investing. What I’ll do if I meet them too early is I’ll say, “I like what you’re targeting. I like your previous experience or your personality. Put me on your distribution list. I’m going to watch what you’re doing. I’m going to continue to watch what’s going on.”

I’ll monitor them, watch what they’re doing and see how they’re structuring deals, etc. When I do the due diligence on them, it’s going to involve a ton of questions about the deal. I usually ask somewhere between 100 and 250 questions on a specific deal. That’s not an exaggeration because I have notes and everything. One thing that is imperative and a test for them is that I will ask each of the managing members for their name, date of birth, home address and background checks.

I don’t like their credit, but I do a regular background check. I don’t need their home address and date of birth typically unless their name is like Steve Smith because there are a lot of those. I asked them to test them to see if they’d give it to me or if there was some hesitation. I always say to them, “Before I run this background check, is there anything I should know about anybody that maybe there is a good explanation for?” I’ve had all kinds of stories. I’ve had one person say, “You’re going to see that I was stopped, they found a gun in my trunk and I was carrying my own gun. It was licensed, but I didn’t realize I wasn’t allowed to transport it from one location to another.”

“Good explanation. Thank you for telling me upfront.” On the flip side, I had people not telling me anything and find a bankruptcy from years ago that they probably thought was wiped off of their background check because it’s been years and they didn’t want to discuss it. I’m not going to move forward with them because God knows what else they’re hiding from me. I always do a background check and then I do it in a specific test way and that’s a very important check. I always meet with someone in person at least once before investing with them. You do all these other data points, but it’s a gut check to me. The in-person thing is a very important gut check.

Typically, I won’t invest with them unless I do at least one walkthrough of a property. While I’m doing that walkthrough, I’ll get a very good sense of how detailed they are. I’m going to give you a quick example. I have two different types of property tours that I typically will experience. One is I’m going to fly to a hotel the night before and they’ll say, “Meet me at the property at 11:00. Here is the address and we’ll check out the property.” I’ll meet them at the property at 11:00. They’ll walk me around the property for an hour. Give me a high-level view of what it is and we’ll do our thing. I’ll go back home.

The other type of person will say, “I’m going to pick you up from your hotel at 10:00. I’m going to drive you to the property. We’ll have lunch after and then I’ll take you back to your hotel.” What happens there is that often that person will, on the way, say to me, let’s say it’s a retail strip center to make it visually easy. We’re on the main strip. They’ll say, “Here is our first competitor.” They’ll stop and show it to me and say, “I don’t think it’s a direct competitor because this tenant has been there this long. This is not a competitive tenant. This one is.” They’ll show me the entire landscape.

They’ll maybe even drive me into the background of the housing and say, “This is where the demand is coming from the center. There is this pre-planned community and there are 6,000 residents here. This is why the strip is probably going to be in strong demand for a long time.” They’ll be so detailed with me along with maybe at lunch discussing the property in much more detail than just the walkthrough that you’ll finish that meeting and say, “This is a detailed person. It’s probably going to translate to everything they’re doing. That’s interesting and a good data point.”

Meeting in person alone tells you a lot when you’re reading between the lines, let alone what you find at the actual property and the quality of the property. My job is to read between the lines. A lot of the questions that I ask are not even that I care about the answer, but it’s more about how they answer that tells me a lot. If I want to see if someone’s conservative because ultimately, I’m trying to find someone who is conservative using conservative assumptions under-promising to hopefully be able to over-deliver and build long-term relationships with investors.

Low Risk Investing: Invest with the best operator with the best execution with the worst documents rather than the worst operator with the worst execution with the best documents.

I’m trying to avoid someone over-promising using aggressive assumptions to make the numbers look good and attractive and potentially not care if the investors are going to invest with them because they’re going to go on to other investors and keep marketing. One of the ways you can do that and sort that out besides looking at their numbers is, I’ll give you an easy example. Let’s say that the occupancy at your apartment building is currently 97% and they are assuming an 8% vacancy rate every year.

You say to them, “Why are you assuming an 8% vacancy rate, the current occupancy is 97%. Why isn’t it 96% and 95%? It’s been 97% for the past five years.” They’ll say, “We’re conservative. We want to make sure that we’re using conservative numbers. We might over-perform, but that’s what we think makes sense.” That tells you one thing. I’ve seen this before, who is currently at 95% occupied and they’re assuming a 4% vacancy rate. You say to them, “Why are you using a 4% vacancy rate when it’s 5% vacancy at the moment?”

They’ll say, “This is in Austin and we’re right near the train. It’s a hugely growing area. We got a 10% rent increase in the last year. This is going to keep going on. The building’s going to fill up because the last 5% wasn’t managed well and there is going to be very strong demand going forward.” That’s what I’m trying to avoid because that’s not conservative. It might be right in the end, but it’s not conservative. I have to do a lot of reading between the lines to assess someone during due diligence. You go and make sure they are thorough. They ran comps properly. They ran a lot of comps. The comps made sense. You’re doing all these different checks that add up to a gut check at the end of the day.

I love how thorough you are and being honest about making sure that they have the experience before you even consider investing with them. I want to talk about diversification because we hear more about diversification in real estate. I don’t hear it talk about diversifying your real estate portfolio. Can you talk about the importance of passive cashflow and investors diversifying their portfolios? How do you do it?

Where it starts off for me is which asset classes make sense or don’t make sense for me to begin with. I’ve already outlined that I won’t look at office and retail because of the lack of predictability of where things are going. I won’t look for hotels because the average daily rate changes every day. I won’t look at a triple-net single-tenant property for industrial, even if it’s a Starbucks, for example, because I don’t want to have a single-tenant exposure. What I do is I carve out what I won’t look at and then you’ve got the rest of what you will look at. What you’re going to do is try to get as diversified as possible across all those.

The biggest challenge we have is that I have no idea. I can’t say to myself I’m going to invest in 4 self-storage properties and 3 mobile home parks and 2 apartments because I have no idea what’s going to come to me. It’s not like I’m going on a shelf at Costco and buying seven things. Diversification happens over time. It can’t necessarily be perfect because you don’t know what you’re going to find. I would argue that you’re better off having imperfect diversification but being much pickier on what you’re investing in versus the other way around.

I’ve seen people say, “I want to invest in 3 apartment buildings and 2 mobile home parks this year.” That’s their mission. I would argue that it’s not necessarily the optimal way to look at it because then you might go into stuff that isn’t quite meeting the criteria you want. In my opinion, you’re putting a round peg into a square hole. I look at diversification across asset classes, geographies and operators. Geography is very important, not just the obvious demographics trends, but it could be weather too. I’ll invest in certain asset classes in Florida than I won’t invest in others because of hurricanes.

Even in the North, mobile home parks have freezing pipes. You have to tailor what you’re doing depending on the geography. You don’t want to get too much exposure to one operator. That’s very important because there is 1% risk and all this. One of the 1% of the risk is Ponzi scheme or mismanagement and that’s not something you could avoid in advance. You won’t necessarily know in advance, but it’s a fact of life and you’re going to have to diversify out of it. I hate to say this, but if somebody had all their money with Madoff, they may have lost all their money, but had they spread out across 4 or 5 different managers, they would have lost 20% of their money.

I’m not saying it’s their fault, but they could have taken a better diversification strategy. That’s very important. Asset classes are critical and part of why it’s critical because asset classes perform differently at different times in the economic cycle. The pandemic is a fantastic obvious example of this. There was a lot of carnage in retail and office during the pandemic, but there was a lot of demand at apartments and mobile home parks and other places in the right locations. That’s why that diversification is critical if you’re looking for more predictable cashflow because it helps to keep everything at some flat range on average. That’s the goal that I have trying to live off the cashflow. That’s how I look at diversification.

You’re in so many syndications. I don’t even know how you manage everything. Do you have a special system? What technologies or systems do you use to manage it all?

Some investors have had tried to create some systems and extra websites to help people manage it. My whole process is very straightforward. I have a spreadsheet. It’s old-school. It’s Excel. The day that I invest in a deal, what I do is I have a cashflow spreadsheet and it goes up ten years. If I invest in something, I’ll find out when the first cashflow distribution is projected to be distributed. I’ll sort it out based on an annualized number. I’ll divide it by four quarterly. I’ll pre-plug in the cashflow I was supposed to be getting from it every quarter and when it’s supposed to come. I can look at any column of any month, which is a column of any year, and see what’s expected.

If something doesn’t come, then I’ll look into it. Also, if something is plus or minus 20% of what is projected to be because projections are only projections. I don’t assume they’re going to be accurate necessarily. If something is within 20% or 25% outside of the range of what it’s supposed to be, then I’ll look into it and see what is going on.

Either downside or upside because even upside, I want to understand like, “What’s going on with the property? Why is it doing so well? Can I change the business plan?” Meaning, will it sell more quickly or less quickly because of it? I need to keep understanding. I track everything in a bunch of rows in Excel, across a bunch of columns. It’s not fancy. Some people probably have better ways to do it than me.

I was expecting a different answer, but you keep it simple and it seems to work.

It is simple. I’m used to using Excel. All I care about is the cashflow. It’s funny because when people look at the IRR, most people look at the IRR or opportunity and then see how it performed. I’m all about the cashflow. I focus number one on the cashflow and then any upside at the end is gravy to me because I’m dependent on the cashflow. I have a little bit different approach than most people.

I have some final questions for you. What are you excited about in your business?

This is going to sound awful, but it’s the truth. I’ve been waiting for years on the sidelines for the end of the cycle. I’m excited about how it continues to go down the path of reducing quantitative easing and then increasing interest rates in 2022. I’m finally going to see the end of the cycle and see if there are asset price resets that I’ve been waiting for.

That’s made me go on pause except for these other buckets and creative types of opportunities I’ve been investing in. I want to go back to the basics and invest in a park building, self-storage and everything else I love. Those are my favorites, but I can’t do it. I’m excited for 2022 and 2023 because it’s going to bring the clarity that I’ve been waiting for. I don’t invest unless I have that clarity. I think it’s finally coming.

Any big goals you’re working on for 2022, either personal or business?

The only thing personal is that we’re considering leaving Los Angeles and moving down to Irvine, which is in Orange County. For those of you who don’t know, it is about 45 minutes to 1 hour South of LA. That’s a definite personal focus for next year. I’m sorting that out around the summertime. Investing-wise, I’m keeping a close eye. The thing I’m watching closest from an investing perspective is the yield curve. It’s been flattening a little bit.

Based on historical data, it tends to predict a recession 6 to 24 months out. It inverted in 2019. We would have a recession in March of 2020 without the pandemic probably. It was a perfect predictor of the midpoint of when that would have been. I’m watching that very carefully and I’ll be watching that into 2022 as well as pricing. I’m monitoring things more than anything.

I like to ask this to some of my guests as well, what does success mean to you?

That definition has changed for me over time. When I started to succeed, I was like, “I was able to leave the corporate world. That was phenomenal.” Now I take it for granted because it’s been so long. It’s fantastic being out of the corporate world. That was a very important milestone of success. I had a certain net worth that I was trying to hit. Everything I have was on paper, so it’s hard to value. You don’t know what’s going to exit out, but I’m there if you take everything for face value. I’m trying to figure out how I redefine it going forward.

Is that a higher network? Is it a different shift of something for me? I’m in the middle of trying to sort it out. You’re asking me a tough timing. I have two boys and I’ve been trying to spend as much time as possible with them knowing that at some point, either they don’t want to talk to me because they’re teenagers. For me, success, up until that point, was knowing that I could be home and spend that time with them. I know it’s carved out and scheduled an hour and a half, from 6:00 to 7:30, but knowing I could do that is great because my father was never around when I grew up.

I’ve overcompensated. I’m trying to spend as much time with them on the weekend and do as much as I can with them. Another huge piece of success for me is, at the very least, teaching my kids how all this works and to invest as early as possible in whatever format they want. That’s giving them a huge advantage. I’ve been successful at this point with my older child. My younger child hasn’t been open-minded to it yet. Kids are all different.

What’s your superpower that has contributed to this great life you have?

I have a lot of patience and a long-term view. I have a lot of persistence and the ability to put my head down and do what I need to do to get through is a long-term goal. That’s why I’m lucky enough to be on this show with you because I had a very slow and steady approach. I still have that. I try not to get caught up with quick profits. As a result, I’ve been able to build a nice cashflow snowball. The reality is that the only reason why I’m sitting here is because I have many years doing it. If it were my second year, this wouldn’t be a very interesting show and I wouldn’t have as much to share, but the advantage I have is time.

To anyone who is reading this who is brand new, the only thing between you and me is that I had time on my side at this point because I’ve spent the time on it, but I also had a very long-term mindset and not to the get-rich-quick mindset that it’s imperative that you mentioned right upfront about all this. My superpower is the ability to trade-off. There are a lot of people that have different things for it, but the concept of like, “Sacrifice today for tomorrow.” I’ve had that mentality for decades. It’s paid off. I could say that because I’ve had the time towards it.

If my readers want to reach out to you, how can somebody get ahold of you?

Everyone is welcome to reach out to me. I’m happy to help. If you’re a brand new investor and curious more about this, I’m happy to help. If you’re experienced and want to network or for any reason, you can reach out to me. My email address is the best way. It’s JRoll@RollInvestments.com.

Thank you so much, Jeremy, for being with me on this episode. My conversation with you is very insightful and full of golden nuggets. Your firsthand experience in this space is amazing. I know a lot of people that are reading aspire to be passive real estate investors as well. Some people might not even think it can be done, but you’re proof, Jeremy, that it can be done.

For any of you that want to reach out to Jeremy directly for questions, feel free to. I’ve connected with him a few times and he has been very helpful. To all of my readers, thank you for checking out this episode. Remember to leave me a review in iTunes as it helps me attract even more great guests, just like Jeremy. Until then, live life abundantly.

Important Links

• For Investors By Investors
• RealtyMogul
• JRoll@RollInvestments.com
• iTunes – The School of Cash Flow