Adam Gower: If you've ever had a dream of living the good life on passive income, then hearing my guest today, Jeremy Roll, talk about how hard he works to maintain a passive-income lifestyle will put the idea squarely into perspective.
Adam Gower: Welcome to the NationalRealEstateForum.org Podcast, Episode 245. Thanks for joining me today. I'm Dr. Adam Gower and this is the National Real Estate Forum, where I speak to leaders of the real estate syndication industry, so you can learn about trends, and practices in real-estate investing, so you can raise capital online, and invest wisely.
Adam Gower: Well, I think today is going to be probably the last, if not one of the last episodes in this series. Thanks so much for listening to this series. The next series is going to be concentrating on actually how to raise money online for your real estate syndication. It's going to be absolutely fascinating. I've lined up a hit list of the wizards of digital marketing, and I'm going to be talking to them about best practices.
Adam Gower: Although I don't have the website name, or anything lined up yet - it's all in process, but moving very quickly - be sure to go to the show notes for today's episode at the NationalRealEstateForum.org website, NREForum.org, and I'll put a link on there, so you can find the new series without any difficulty.
Adam Gower: Interestingly, I've also been working on an educational series that uses case studies from the SmallChange.com website to look at some of the key concepts in real-estate investing, primarily for the investor. What's particularly fun about that project is that it is a series of 02:20 videos, no longer than 02:20 videos that will be syndicated on all five social media platforms: Facebook, Twitter, LinkedIn, YouTube, and Instagram, which took me a solid two weeks to figure out how to actually turn it on, right?
Adam Gower: We're going from absolute zero to warp speed in a very short period of time. Anyway, go ahead, and check out the show notes for today's episode at NREForum.org/Jeremy. I'm going to go ahead, and post links to all those other channels, where you can find that fascinating series. Fascinating for two reasons. One, the content, of course, is, as usual, scintillating, but also, the delivery method is experimental, and will be illustrative of the kind of techniques that you can also apply for raising capital online.
Adam Gower: My guest today is Jeremy Roll. Jeremy is a professional investor, and has established a lifestyle of earning his income from passive investments. His story is particularly interesting for two reasons. One, passive, in his case, and I suspect in anybody's case, actually, is anything but passive. It's strictly a description that is founded in the tax code - passive versus active income, I suppose. I'm not an accountant.
Adam Gower: It requires a lot of hard work, and a lot of attention, so it's definitely not about sitting around on your hands being passive. Also, because Jeremy has such a broad experience of investing that his insights are very interesting, and I'm sure you're going to enjoy his thoughts about what to look for in a real-estate sponsor. If you want to reach Jeremy, you can find out more about him by going to the show notes page at NREForum.org/Jeremy. Here is Jeremy Roll.
Jeremy Roll: Thanks for having me on the podcast. I really appreciate it. My background on the passive-investing side is back in 2002, I was working in the corporate world, and I was really sick and tired of the stock market for two reasons. One is because of the volatility. This was right after the Dot-com crash; that was really my catalyst. I'm just a really kind of low-risk-prone, steady guy, and watching the market go up and down 30 percent a year was just not for me.
Jeremy Roll: The less obvious thing, actually, that bothered me even more was the lack of predictability in the stock market, for my long term retirement situation, as far as where was I going to be in 10-20-30 years? That was really bothering me more.
Jeremy Roll: I looked at different ways to invest. Came across the concept of passive investing; then eventually honed in on passive investing, and low-risk cash-flow opportunities. I really look for more predictability. Really, the word 'predictability' was key for me, because that's what was driving away from the stock market.
Jeremy Roll: I basically rotated all my money from stocks and bonds into cash-flow opportunities, between 2002 and 2007. Had a last-straw moment in the corporate world, in mid-2007, with my manager. I was actually working at Toyota headquarters at the time, and decided to leave the corporate world in 2007, because I had enough cash flow built up to live off of, from having rotated everything out of stocks and bonds, at that point.
Jeremy Roll: I've been at an investor, a passive investor, for 17 years now, in various opportunities. I've actually been in over a hundred, over time, for sure, and more than that. I'm currently in, I think, over 60 or 70 opportunities, right now, and I've been a full-time passive investor for almost 12 years now, but a passive investor for about 17 years.
Jeremy Roll: That's my background as it relates to cash-flow focused, and passive investing. It's worth noting, I have also built up my own investor group over time. I have over a thousand investors, but most the stuff I invest in is just for myself, as a passive investor. Once in a while, I might send an opportunity to the group that I'm investing in, and they can choose to invest in it, but, for the most part, my focus is for my own investing.
Jeremy Roll: I've looked at many different opportunities over the years, and I've invested in most of the major commercial real estate asset classes, and the residential real estate asset classes, as well as some ATM machines, and cash-flowing websites; some oil and gas opportunities, and even a handful of start-ups. Those are extremely rare for me. That's the point I have to make about [inaudible] a specific person, and there's been a few over the past few years. I am a very big fan of more predictable lower-risk passive cash-flow opportunities.
Adam Gower: Did you see this article recently about Jeff Bezos's first million that he raised? Had to 60 meetings before he raised his first million for 20 percent of Amazon. Talk about a start-up, right?
Jeremy Roll: Wow ... I actually saw a video on him. He was interviewed in 1997. It was so interesting watching him back then. He's just such a different person now, to begin with, and just hearing ... They were in their office, and it was such a small office. They were like hand-packing the shipments at the end of the day, on ... It was a very funny story about like they had to basically pack shipments on the floor, and then someone finally suggested, "Why don't we buy a table?" He didn't even think of that. He was actually just standing to pack everything. It was really interesting.
Jeremy Roll: His business, at the beginning, when he raised the first million, was so different with the focus, and everything, and it just evolved ... I'm amazed at what he's done, frankly. I order from Amazon literally every week-
Adam Gower: All the time. I know I do, too. We're going completely off subject, but that's okay just for a moment. Another one of my heroes is Richard Branson, of Virgin fame; Virgin Atlantic, and Virgin everything; Virgin Galactic, I think he has. You're familiar with Richard Branson, right?
Jeremy Roll: Yeah. In fact, I actually have a signed book of his that I won in a raffle. I didn't mention this in my introduction, but I actually have an MBA from the Wharton School. He came, and presented to us. This was back in '98 to 2000, when I was there. I don't remember the exact year. Yeah, it's amazing what he does. That's another truly fascinating person [cross talk] in terms of what he's accomplished.
Adam Gower: -you know how he started? He started, selling records. Did you know that? His business was originally used records. Before he decided on calling it Virgin, he actually ... The other name that he came up with was Slipped Disc Records. Slipped Disc Records, and he opted for Virgin, instead. Interesting that he, and Bezos started with completely different businesses than they ended up with [inaudible], or at least they grew into extraordinary empires.
Adam Gower: Let's get off that. because you and I love ... We can always go down these conversations, and I do like it, but let's try, and get back to real estate. I actually have a question for you, Jeremy. When you started, or actually, when you had finished migrating from stocks, and bonds in 2007 into real estate, you had actually just timed it for the very peak of the market. Tell me something, before we start talking about other subjects today, tell me a little about your experience during the downturn of 2008-2009, and how that informs your point of view, today, and where we are in the market, today, or in the cycle, today.
Jeremy Roll: Yeah, great question. I tried to keep my introduction succinct, but to give you more details, as it relates to this, I'm originally from Montreal, Canada. When I started investing in 2002, what I quickly recognized is that I had no idea what I was doing. I didn't really know real estate. I didn't know commercial real estate, certainly, and I didn't know cash-flow investing. I didn't really understand it very well, as far as understanding the details on what I ... I had no clue what I didn't know.
Jeremy Roll: I was very lucky, because I was able to start investing in Canada, with lifelong friends of my family; I'd known them since I was five years old. I used to play hockey with the kids, and when I was growing up, they were a couple blocks away [inaudible] street hockey all the time.
Jeremy Roll: I actually approached them, to invest with them first. They had actually been syndicating opportunities in commercial real estate for about two or three decades, at that point. I was lucky, because I said to them, "Look, I really want to learn. I want dip my toe in with a couple deals, but I want to learn about how all this works."
Jeremy Roll: They were very, very detailed, and very conservative, which matches both ... key pieces of my personality. I got to learn a lot through them, and, frankly, a little bit by luck at the beginning, between '02 and '05. I focused mostly on Canada, and by the time '05 came around, I remember I had been just sucking up as much data and information as I could. There are many sources. I concluded that the housing market was going to crash at some point. I just recall it, because I was much younger.
Jeremy Roll: Between '05 and '08, I was very young, no kids, so into having fun. A young guy going to dinner parties, and all this. I actually remember that I would be the crazy person at the dinner party telling people this housing market was going to crash. It took like three years. That's a long time of saying that to people, and you're looking like a crazy man.
Adam Gower: But you were right.
Jeremy Roll: Yeah, exactly. I actually watched all this happen, but it was almost like in slow motion.
Adam Gower: Be sure to go to the show notes for today's episode at NREForum.org/Jeremy, where you'll find links to my educational series on real estate investing, made up of short videos on all the major social media channels. When you're there, go ahead and leave a comment below, and let me know what you think. That's NREForum.org/Jeremy for all the links to my new educational series on real estate investing.
Jeremy Roll: First of all, I actually am very lucky because I had no investments I ever made in the US that were ... For example, foreclosure has challenges because of the downturn, which is crazy, but it's because, at that time, I was mostly exposed in Canada. I was just very lucky. By the time I was worried in 2005, because I'm really low-risk, I worried years before, I not really was considering anything here.
Jeremy Roll: I really sized up everything, and honestly, just very lucky - bottom line. That being said, having watched the last downturn, and having read all the data coming up to it, I would say that it made me ... If you think about it, the degree of what happened in the last downturn was quite severe, compared to historical cycles, both in terms of housing prices, commercial real estate prices, and the general stock market, and the economy.
Jeremy Roll: That is definitely an outlier, but it's great to go through an outlier, without having experienced a crazy amount of pain from it, because you can watch from the sidelines, and learn a ton. Unfortunately, me starting already out as a very conservative person, it's made me even more paranoid about the next cycle downturn. Not that I think that - realistically, objectively - we're going to have the same degree as downturn as last time, but more of the understanding that it's comparative for someone like me, who's a passive investor, who gets locked in, long-term, into deals, to think way ahead.
Jeremy Roll: Honestly, I don't think enough investors think far enough out. What I mean by that ... Let me give you an example. I had literally started investing for a downturn out of 2013, thinking the downturn would be in 2018, which was clearly incorrect. We're recording this in 2019; there hasn't been a downturn yet. I extrapolated that based on previous cycles - how long the cycles have been, et cetera - and also how things work after a major downturn, and a major downturn that was related to debt.
Jeremy Roll: Long story short is it's not like I was stopped investing in 2013. The difference was that I was only investing in asset classes, and in fields that I thought would do well during a downturn, in the right markets that would experience less volatility during downturn, all the way back then, because I was investing in 10-year deals. I was typically looking for a fixed-rate 10-year loan for more predictability. Of course, that's just one strategy of many you can use, but that's what I did, so I've truly been investing for a downturn since 2013.
Jeremy Roll: The other thing I've also noticed that I've done is I have very much changed what I'm investing in, and I shift focus, depending where we are in the cycle, because I try to stay away from what's hot. Let me give you an example. This is probably going to sound extreme to a lot of investors out there, but I have literally shied away from apartments, as of 2013. The reason is I started to see prices go up, cap rates go lower. For me, it's like why am I going to take the same degree of risk for a low return, and less of a multiple? I then shifted focus to self-storage; I shifted focus to mobile home parks, at that point [cross talk]
Adam Gower: Let me jump in, actually, and ask you about that. What about value-add apartments, because that's a different [cross talk]
Jeremy Roll: Right, so, great question. Yeah, great question. I don't typically do heavy value-add; I do minor value-add. Again, that's just my really low-risk profile, right? The most degree of value that I would do in apartments is the following strategy. Buildings ... Well, actually, in value-add, 90- to 100-percent occupied. I'll actually invest the stuff that's 80- to 100-percent occupied, but for this type of strategy [inaudible] it has to be highly occupied.
Jeremy Roll: Then, the operator says, "Look, the units are a little old. We're going to ... We've got CapEx reserves right now to actually redo the interior of all the units, and do a little bit of exterior work, but nothing crazy. We think we're going to be able to bump up the rents, but we're not going to force anybody out. That's not the strategy we're going to use."
Jeremy Roll: "We're going to say when the person vacates, instead of taking on a new tenant immediately, we're going to go ahead, and do the work for a couple of weeks up to a couple of months; have that unit redone. Then, this is going to be a three- to four-year process, but we're going to have the vast majority of the building done in three to four years. In other words, we're not going to force people out on renewals. They should continue to stay in that apartment. When they want to leave, that's when we'll actually go [inaudible] ..."
Jeremy Roll: It's a lower-risk strategy to keep the occupancy rate higher, and not to force depreciation as quickly. That's about the highest degree ... I actually invested in a deal in 2013, and apartment building in Mesquite, which is a part of Dallas, Texas that was that exact profile. It worked out really well, and it was very unique price at the time but. That's the most value-add I would do.
Jeremy Roll: I think that in today's market if somebody is looking to invest, I personally think one of the best investments potentially is doing a value-add strategy in an apartment, at this point in the cycle; although I think that apartment prices are ludicrous. I think that if you're willing to take the risk of the execution risk, and the refi risk of getting a value-add deal done right now, I see why it would make sense, because apartments tend to have relatively secure rents. They don't go down as much as other asset classes during downturns. Just generalization, compared to others.
Jeremy Roll: I see strong demand in apartments for many years to come. You've got to be in the right location, in a strong demand area, strong economic area, and a strong population growth area. I 100-percent agree with you. I see people doing that actually, and I understand the strategy. It's just not the right strategy for me, but there's many different ways to invest.
Adam Gower: You've described investing across a broad range of asset classes. Let me ask you something that is presumably consistent, irrespective of what asset class you're investing in. That is the sponsor, the person that's actually operating, and managing the deal. What are the key things that you look for in a sponsor? Is it uniform across asset classes, and what do you look for?
Jeremy Roll: That's a great, great question. It's funny, because this I have learnt over the years that the most important thing to focus on in a deal is actually not the actual property, but the sponsor stuff. I tell people number one is the sponsor; number two is the property. Now number two is a very close second place, because clearly the property is extremely important, and everything surrounding it, as far as all the analysis running is very important.
Jeremy Roll: To me the sponsor is the number-one piece. I like to give this example. I live a couple blocks south of Beverly Hills, and LA, so this is why I use this example. I say, "Look, I can invest in the best building in the best part of Rodeo Drive, the fanciest street in Beverly Hills, with the best tenants, and it's 100-percent occupied right now. If I invest as a passive investor, and the operator runs that building to the ground, then ultimately, we won't have any tenants, or we'll have a more vacant building, and we're going to end up foreclosing, and we're going to give the keys back to the bank. It didn't matter that we were in the best location with the best tenant. Literally didn't matter." That's how important a sponsor is, relative to the property, in my opinion.
Jeremy Roll: I also want to point out something really interesting, and it's something I used to do, when I first started investing in start-ups a long time ago. I think it's a critical error, which is, you've got to make a bet on the person, and then look at the idea in a start-up. I mentioned earlier on this podcast that I invest in a handful of start-ups is when I have to make a bet on a person, and then, I also think the idea's good, but that's like the second place. Don't get enamored with an idea in a start-up; make sure you're betting on the right person. Don't get enamored with the property; make sure you're betting on the right person. It's the same principle, in my opinion.