In this interview, we will learn what do passive investors look for in an operator as well as in a deal. We are interviewing Jeremy Roll, a passive real estate investor since 2002. Because of his investments, he was able to leave the corporate world in 2007 to become a full-time passive cash flow investor. He is currently an investor in more than 70 opportunities across more than $1 Billion worth of real estate and business assets.

How did you get into real estate investing?
I like to call myself a full time passive cash flow investor. The reason why I got into real estate is because I wanted to get out of the stock market. This goes back to 2002 after the dot com crash, for those of you listening, and can remember it. I was sick and tired of the stock market for two primary reasons. One was the volatility, which I'm just a really low risk, slow and steady guy. Watching the market go up and down 30 percent in the year was not for me, but more importantly was the lack of predictability for my retirement account. In other words, where would my retirement account be in 10, 20, 30 years? Given that, it's just very hard to predict where the stock market is going at any given time. And the way that I concluded how I could find predictability was in what I call a lower risk passive cash flow opportunities, and it end up being that real estate was the main source that I found. That was probably the best source for me. I typically invest in commercial real estate and some multifamily. As a result, I normally target about 80 to 100 percent occupied stabilized buildings that may or may not have any value add upside. That's kind of optional for me, I truly want to go to sleep tonight, wake up tomorrow, and not much has changed. I started investing in 2002 in real estate and by 2007, the passive cash flow actually got me out of the corporate world.

You mentioned that you got out of the stock market. Are you 100% out? Or do you still have some stocks?
No, I am 100% out. I'm all in on this cash flow strategy because it has completely changed my life. The last time I owned stocks was in 2007, I rotated out of stocks and bonds into cash flow between 2002 and 2007.

That's quite a timing to get out. Impressive.
It's funny because I also put a pause on my real estate investing between 2005 and 2008, except for unusual opportunities, because I was worried about a downturn. But I had sold everything off on the stock market side by 2007.

You are a full time passive investor. That means that you are investing in other people's deals. How do you evaluate an operator before investing with them?
Great question. I want to stress the fact that the operator to me is even more important than the opportunity. I would say that's number one. Number two is the actual opportunity itself. And I want to be clear, too, that the actual opportunity you're investing in is very critical, clearly. But who you're making a bet on when you invest passively is absolutely critical. And the reason is because typically when you're investing passively in the way that I do it, I invest in what's called syndications, and what that means is that they're pulling a number of investors together, it could be several investors into an LLC and we're typically buying a property. When you do that as an investor, you're considered a limited partner, or in the LLC or the actual entity you're investing in.

When you're a limited partner, you're essentially giving up control. You do have a vote for certain things, but your vote is a very small percentage. Essentially, you're giving up control and you don't have too much of a vote. So who you're making a bet on is absolutely critical. And I'm going to try to keep it high level because we could talk about this for a long time.

1. The first thing that I look for is an operator who is conservative, who is looking to under-promise and over-deliver and have longer term relationships with investors. I try to avoid operators who are aggressive with their assumptions and their projections to make the numbers look really good so that they can attract investors based on the projected returns, but that may or may not perform to projections. And they don't usually care as much whether they do because they'll just go find new investors if they have to, because they're not thinking long term as far as from an investor mindset. Now, the tricky part is how you sort all that out. And when you review an opportunity, the numbers will tell you a lot about whether someone's conservative or not. They won't tell you the whole story. But that's a good place to start.

2. From there, I ask a lot of questions. It's very common for me to ask 150 to 200 questions about an opportunity. Some of those questions are going to be purposefully designed and asked. I don't necessarily care about what the answer is, but more how they answer it and reading between the lines. If someone's answering me in certain ways and saying "Well, we believe this property is going to do X and Y, but we we use this assumption which is much more conservative because we want to make sure we were conservative for investors. We think it's going to over perform, but we want to set the right expectations." That type of an answer to me is very valuable, it tells me their mindset. If I ask the question "Why did you assume that rents were going to go up on average 5 percent for year for the next 10 years?" And they say that rents are actually going up really strongly in this area. It's been booming and we just don't see that stopping. Not only are they, in my opinion, unrealistic, but they're also setting expectations that are probably too high for investors. The number is going to look great, but that also tells you a lot about the personality you're dealing with. And at the end of the day, what you're trying to do is assess who you're making a bet on. How through have they been in analyzing the property? That's just one example of how you do it.

3. I do background checks every time on all of the key managers and the opportunity.

4. I don't usually invest with someone unless I met them in person at least once. And that's because I am a very firm believer in doing a gut check after doing all your due diligence. Are you 100 percent sure you want invest with someone or there's this 5 percent question mark, you don't even know why, but your gut is telling you that it's not a perfect scenario and maybe you should pass. That's a very important thing. And I feel like meeting in person is an important part of that process. I know it's very hard for some passive investors to do, but it's part of my formula.

5. If you look at the legal documents, which are very important, sometimes they may tell you a little bit if this operator is looking to make this a win win structure for investors, whether it's preferred return, profit splits. I could tell you some examples of some rules where it's very obvious that they're not trying to make anything in favor of investors. They're working at it to maximize the situation for themselves. When I see an operator not trying to get a balance between the investors and themselves as far as profits, I'm just not aligned with the operator properly from a philosophical perspective.

The bottom line is that who you're making a bet on the most important thing, and I'm glad you asked this question because it's a critical thing to focus on for passive investors.

On the numbers side of the house, is it important to you if an operator pays themselves an acquisition fee or not? Whether it's upfront, in the middle, or in the end? I've heard both opinion. What is your take there?
I look for a balance. I'm a firm believer that they should get some money upfront because they spent months and months trying to find a property. They've spent weeks and weeks doing due diligence on it and spent a lot of money on it themselves out of their own pocket, etc. I believe in getting a nice balance. But I also believe that as an investor, it's my duty to know what the market is, how much of an acquisition fee range is market rate, between X and Y percent.

If it's out of those bounds, I don't really think that's fair and it's important to know what those bounds are because that's already telling you something about the operator. If you know what the bounds should be, it could be out of bounds, and it could be high or low. Sometimes it's out of bounds low, meaning I don't think they're taking enough upfront fees. It could be zero, or .5 or whatever it is. And I would recommend that they take a little more because if I'm going to make a bet on someone, I want them to be incentivized. If the profits split are too in favor of investors, I get a little bit concerned. If it's not enough in favor of investors, I'm even more concerned.

When you're making all these assessments of the fees, at the end of the day, as an investor, the same building that you could be investing in could be structured 50 different ways in terms of fees and splits. Each different way is going to have consequences both from how motivated is the operator, but also what is your risk reward ratio. You're going to take the same risk on the same building, assuming the operator is similar across all of them, and you're going to get a different return depending on how it's structured. You want to make sure that you get a fair return. And I don't believe in getting an outsized return where the operator isn't making enough money. I don't think that's fair. But I also don't believe in taking on less return for the same risk for myself. And that's why it's important to really understand the market rates and what investors should be getting. I like landing in the middle.

What would be a standard set of numbers that you like to see, let's say 2 percent upfront, and them putting some money in the deal?
You'd have to tell me how big the opportunity is, how much work they're doing, because that will vary depending on whether it's a one million dollar acquisition, or a ten million dollar acquision, or whether it's value add, stabilized, how experienced is the operator.

High level works, let's say value add, and someone that has done a few properties already. Purchase price $3-5 million.
I normally invest in properties that are ten to twenty five million, which is the upper end of what I call non-institutional, where you're not bidding up against large hedge funds, but you're getting a lot of scale, a lot of diversification. 3 percent of a 3 million property is very different than 3 percent of a 100 million our property. To me, it's on the lower side. And I believe that the lower the acquisition is, the more I can justify and understand a higher percentage.

If I saw a 2 to 3 percent range on a 3 million dollar deal, I think that is reasonable. Some people might think that's high because they're used to seeing 1 or 2 percent on larger deals. But you have to take a look at the absolute dollars that the operator is getting, in my opinion. If you do 1 percent on a $3 million deal and they're getting $30,000, and all these travel costs, and everything else came out of pocket. They actually spent more money than they are recuperating to begin with. It's already starting off on a challenging foot from the operator perspective. So that's my take on the acquisition fee in that range, especially for value add where they're going to do more work.

A lot of investors think it's very important that the operator puts some of their money into the deal. Is that important to you as well?
Yes. Optimally, I love to see a 10 percent co-investment. I wouldn't expect a penny more than that. And that would be optimal. I'm completely fine with a 5 percent co-investment. Where I have a personal trouble with is if someone's putting in 0 percent co-investment.

Now, if someone is extremely experienced, that's different. Let me give you a real life example. I have investments with two of the top 40 self-storage operators in the US. One of the, owns maybe 40 to 50 properties. Can I expect that they have enough equity between loan guarantees, and other things, that they'll be able to co-invest 10 percent in every single deal across 50 deals? I just don't think that's reasonable. And not only that, but I also think that it's probably not as necessary because with the amount of experience they have, they're going to be more attractive to investors. And typically when someone has more experience, I believe it helps to reduce risk. I am willing for them to go with the smaller co-invest and sometimes even no co-invest. The concept of me being able to invest in a top 40 self-storage operator in the US, am I willing to give up a co-invest in exchange for all that experience, their knowledge, their contacts, their efficiencies, and their economies of scale? For me personally, yes. I know there are some investors that would say no, but I'm actually OK with that. And it's going to be a sliding scale for me depending on how experienced the operator is.

You are a very fair investor.
When you're an investor in real estate, in these types of opportunities, what you have to understand is you're investing in a business. It has income and expenses. And I am a big believer in the partner that you're investing with having their fair share of the profits. I'm also a big believer in making sure that I get the right risk reward ratio for myself. That's why I always look for balance.

How do you evaluate the deal itself?
I call it trust, but verify. What I mean by that is that I'm going to put trust in this operator, that they really know what they're doing. And I typically invest with more experienced operators and they normally do have a lot of experience and know what they're doing. But I also want to verify. What I mean by that is that, let's assume that I've already agreed that the business plan looks good to me, I'm on the same page in terms of what I'm looking for. It's meeting my criteria. Then I'm going to try to verify that they've done their homework in terms of is this the right market to invest in? Is this the right location to invest in that market? Where is this market going to be in five or 10 years? I'll ask to see what data sources and what data they used to actually justify that this market makes sense to invest in. That's taking a look at what they've done and verifying.

I'll also then do a separate analysis myself to collaborate or corroborate that data as far as "Ok, they used this data source, data source X, that data source is only one data source". If you look at another one, it might be different. It may have a different opinion about this area. I'll cross-check it against other data sources to see if it all jives. And it's similar for comps for example, when you're comparing the right pricing and even the price you're paying for the property. I'm going to verify if they done their homework. And equally as important, if they've done their homework, and I'm able to verify that, do I agree with the concept they used?

You can do a lot of things with numbers. When I was in the corporate world, I used to do a lot of things with numbers and you can make them look a thousand different ways. The question is, do you think that they used the correct comps? And that's some of the homework you're going to have to do to make sure that you agree with the way that they've analyzed the building. That's very important on the rent side and on the pricing side, even.

One thing I will tell you that's an intangible that I love to do is when I'm meeting someone in person, it's typically going to be at the property. And there are two different types of meetings I can have. One is someone meets me at the property and they tour me around the property, and they show me all the reasons why they want to acquire the property, and maybe the challenges, and how they're going to dress them. And then we go off on our ways and that's an hour or so meeting. What I really love is the second scenario, which is someone who says "I'm going to pick you up from the hotel and I'm going to drive you to the property. And on the way, I'm going to show you our six competitors and I'm going to tell you why I think this is a good deal based on what I see. And I'm going to show you other kinds of indirect competitors in the market and why this location is a great location. And by the way, let's see some better locations to see how they compare. I'll show you how close it is to the freeway." And I can go on and on.

You get this amazing perspective going into the property and then when they take you back, they may show you some more things. And that is just a different level of detailed analysis that somebody has done on the area. It's not just about the numbers and looking at these numbers on a piece of paper that somebody gives you. That's why I like meeting in person, because you get a whole different perspective and a different sense of this trust but verify. How well do they really know the market? That can show up in that half an hour additional time in a car. I've tried to keep it short here, but those are some high level examples, for anyone listening, to think about how to really make sure that you agree that you're on the same page, and you use the trust but verify model.

Jeremy Roll