Episode 43 – From W-2 to Living Off Passive Investments. Yes, Financial Independence!
For more details visit: http://www.TheGoldCollarInvestor.com/show43
Jeremy Roll has been living off his passive investments since 2007 when he quit his full time job. Jeremy is the President of Roll Investment Group.
Jeremy started investing in real estate back in 2002. In 2007, he quit his W-2 job to get full-time into real estate investing. Today, Jeremy manages real estate properties worth a billion dollars. So, how did Jeremy do it and how can you do it
This show will be particularly interesting to those who are looking for alternative choices to their day jobs and wish to get into entrepreneurship. You will learn how you can manage real estate properties in a hands-off manner. We also reveal the returns that you can expect to earn from real estate. Towards the end, we speculate how the current COVID-19 situation will impact different real estate asset classes.
We hope you enjoy this show!
- 00:44 – Can you grow your passive income by investing in a real estate syndication?
- 02:05 – Pancham welcomes Jeremy to the show
- 02:35 – From a middle-level corporate manager to owning $1 billion in real estate – how did Jeremy do it?
- 05:13 – Jeremy shares some interesting information about his non-profit which is designed to help investors
- 07:40 – Was it difficult for Jeremy to start his business in 2007 at the peak of the recession?
- 09:37 – Which asset classes does Jeremy prefer to invest in?
- 11:50 – Jeremey shares how he managed to earn a 50% return by renting out real estate to data centers
- 14:11 – How many operators has Jeremey worked with over the years?
- 14:47 – How does Jeremy vet operators?
- 16:16 – How to analyze numbers and discover good investment opportunities in real estate
- 20:46 – What kind of annual returns does Jeremy earn?
- 23:02 – Post-COVID-19, what kind of returns can you earn from real estate?
- 24:22 – Things new investors should consider before investing in real estate
- 26:50 – Will COVID-19 result in an immediate drop in real estate prices?
- 30:43 – Taking the Lead Round
- 30:43 – When was the first time Jeremy invested outside the Wall Street?
- 31:46 – What fears did Jeremy have to overcome when he first invested outside the Wall Street?
- 32:52 – Can you share one investment that did not go as expected?
- 40:26 – What is one piece of advice you would give to people who are investing outside of the Wall Street?
- 41:50 – Tom shares his contact information
3 Key Points:
Welcome to the Gold Collar Investor podcast with your host, Pancham Gupta. This podcast is dedicated to helping the high paid professionals to break out of the Wall Street investments and create multiple income streams.
Here’s your host Pancham Gupta.
Pancham: Thank you for joining me today and I really appreciate you listening. Every time I hop on a call or meet someone new and we start discussing investments, the topic of passive investments comes up more than 90% of the time. syndication is one great way to invest passively to make your money work hard for you. For people who have never invested in syndications. They are skeptical of it at first. I do not blame them as I was skeptical to when I got introduced to it for the very first time. The most common questions that I get from people who are relatively new to the world of syndications are some, some of them are as follows. How does syndication work? Is it possible to create enough passive income to replace your salary? What are some of the risks involved? Is my money liquid? What if I want to get my money back before the syndication goes full cycle etc. Today I have invited a guest who has been living off his passive investments since 2007. He started investing passively in 2002 and left his job in 2007 at the peak of last bull market and survived the crash. He has grown his passive investments over the last decade into many different asset classes, and currently is an investor in more than 70 opportunities across 1 billion worth of real estate and business assets. He’s going to talk about how he did it. Jeremy, welcome to the show.
Jeremy: Thank you. Thanks for having me. I really appreciate it.
Pancham: Are you ready to fire up my listeners break out of Wall Street investments?
Jeremy:Absolutely. I very much look forward to it.
Pancham: Great. Great. So, before we begin, do you want to give a quick overview about your background to my listeners?
Jeremy: Yes. And thanks again for having me on. I really appreciate it. Yeah, it’s a good topic that I think we’re talking about in general, because I actually have been I’m very fortunate, I actually was able to leave the corporate world thanks to cash flow back in 2007. And I’m recording this in 2020. So it’s been a long time now. And you know, I just a quick story for me is that I have kind of 10 plus years of corporate experience. I went down a typical corporate path. I was kind of a middle level manager. In my last job. I worked for Toyota headquarters at the time. I’ve also worked for Disney headquarters. I worked at General motors headquarters. So I also have an MBA from the Wharton School or University of Pennsylvania. So I went down a very stereotypical corporate path. But what happened for me is back in 2002, after the.com crash in the stock market, I was sick and tired of the volatility because I’m really low risk, slow and steady guy, and also the lack of predictability of the stock market. And it was the lack of predictability that really bothered me the most. So I was looking for different ways to invest. And I want to say it’s interesting times right now, because we’re recording this in about mid-March, where we’ve had the Coronavirus, and we have the stock market that just plunged 30%. And so probably a lot of people can relate. So I was just really upset by the lack of predictability of where my retirement account would be in 10, 20, 30 years from now. So I looked at different ways to invest and came across the best fit for me, I thought was going to be more predictable cash flow, and I found that through investing passively in real estate and was looking I was focused more on commercial real estate as well as multifamily. And so I started to invest back in 2002 Long story short is I ended up rotating all my money from stocks and bonds into cash flow between 2002 and 2007, I actually did not intend on leaving the corporate world, it wasn’t like I had a master plan to leave the corporate world, I actually want to have the paycheck. And the cash flow…the cash flow meant for more predictability for my retirement account. And long story short is I had a last moment with my manager to at headquarters actually back in oh seven, and decided to leave the corporate world because I had enough cash flow built up to live off of and so I take that chance and give it a try. And so I’ve been a passive cash flow investor since 2002. And I was able to leave the corporate world from it since 2007. So I’ve been full time since 2007.
Pancham: Wow. So when you say full time, you mean full time passive investor?
Jeremy: Yes. And I’ve been a full time, you know…I don’t want to sound like an infomercial. But cash flow has completely changed my life. And I’m sure a lot of people out there can understand because I went from being in the middle of a manager position at these great corporate jobs to Being able to do basically control my own schedule, etc. And so it just complete 180 shift and I really wouldn’t have it any other way. Well, a couple other things I should mention as well is that I did actually co-founded a nonprofit in 2007 called foreign investors by investors or FIBI. And the whole point of that nonprofit was to help investors to unite through networking and in person meetings, and exchange information and learn from each other without any sales pitch. So we have a very strict no sales pitch policy and most of our meetings are in Southern California, a lot of them are in LA specifically. And even though we’ve lost money on that each year, literally, we have over 30,000 members now, I think we’re the largest series of non-institutional public real estate meetings in California. And so I’ve been very fortunate to have a lot of networking and a lot of great learning from that. And I’m also an advisor for Realty Mogul. I think it’s the largest crowdfunding website in the US at this point. I was an advisor for them since before they launched been on their investment committee for a couple of years as well. And I’ve done a little less advisory for them the last couple of years, but I’ve been involved with them for many years now. I think I’ll stop there. I know that’s a lot of information.
Pancham: No, that’s great. This is, this is pretty awesome background. And I think a lot of my listeners would want to be in the position that you’re in. And I think passive cash flow is something that caught you there. So if I understand it correctly, going back to your story back to 2007, you quit your job, because you got for the lack of better word like for riffraff between you and your manager. And you said, you know what? I’m done with this career. And I want to quit. You didn’t know when you were quitting that you’re going to know not go back to the corporate job. Is that correct? Or you were already prepared to quit? And you knew that you have enough passive income, and you’re going to not go back to the corporate job?
Jeremy: Yeah, good question. So at the time, when I left, I decided to kind of take a risk. I gave it kind of a two year run-away in my mind. And I said, if it doesn’t work out as planned, I’m going to go back to the corporate world. But I’m hoping to not to have to go back to the corporate world. That was my goal at the time. I was honestly just kind of fed up with the corporate world. So thankfully, 13 years later, I still haven’t gone back. It’s actually been about 12 and a half years now. But yeah, my intention was to not go back at the time.
Pancham: Wow, that’s pretty awesome. So obviously, that has worked in your favor. You spent those two years and that time, actually the recession hit two. Right. So how did you navigate that part?
Jeremy: Yeah, great question. So, you know, it’s funny, because it wasn’t just the recession. From my perspective, my wife was actually leaving her job actually, the whole time, because we were actually expecting our child in that fall. And furthermore, I was quite convinced we were going to have a recession within a year, but I really wasn’t worried about it because I had a lot of really good cash flow sources. And one of the things I was very lucky with that. When I started investing back in 2002. I started off investing in Canada, because I’m from Canada, originally from Montreal. And as it turned out, a lot of the investments I made in Canada weren’t nearly as badly hit as they could have been in the US. And so we got through the recession with plenty of cash flow. And it wasn’t just real estate that I invested, there was a whole bunch of other cash flow type of things. And then we were just able to continue on, but I really wasn’t too concerned about it at the time, because you know, I am very careful when I invest in I go into more predictable stabilized stuff, and to an extent that stuff in a mess and I try to go into stuff that I think will get a little bit less harm from a downturn, so it end up working out. Okay. And, you know, in fact, I actually never even ended up in a foreclosure from the downturn last time, but it’s because I’m really low risk. So like since 2005 2005, and oh, wait, I was mostly on the sidelines, still doing some investing, but at that point, just being ultra-cautious. For example, matters. was on the sidelines between 2016-2017 and 2020. Until now, mostly on the sidelines, same reason. So I think my conservative nature was very helpful back then, as I was, I was lucky that I actually made a lot of my investments in Canada instead of the US.
Pancham: Got it. Got it. So pre-2007 and post-2007. If you can talk about like what kind of vehicles or at a very high level, or asset classes Did you invest in for the cash flow? And I’m assuming when you say it’s passive, so there were other people, they were all syndications, or they are private placements.
Jeremy: Well, so not all the investing I did was in real estate but for the real estate stuff. Yes, it was all syndications. I was always a passive investor. I’ve never been an active investor ever. And when I invested pre 2007, the asset classes for real estate that I mostly did was retail office and industrial.
Pancham: They were in Canada, too.
Jeremy: Yeah, they were in Canada and post 2007 as I learned more about new asset classes, I expanded into many so I mean, I am in most asset classes now. I mean, I’m in multifamily student housing, multifamily, senior living, RV park, mobile home parks, self-storage, all the other asset classes I mentioned as well. And different aspects of single family that I was in earlier this cycle like between 2009 and 2015. I have a little bit of ATM investing, which is not real estate. A little bit oil and gas. And I have a handful of startups. But as you could tell, like my strategy is actually to be hyper-diversified. So probably maybe even too much diversified
Pancham: Yeah, that’s hyper diversification and pretty awesome. So I have one question that goes, again from pre 2007 before you quit your job and after you quit your job. So after you quit your job, all of your cash flow was coming from these investments that you did pre-2007. So since then, you basically have just reinvested took that capital and reinvested that…reinvested and reinvested into all of these different asset classes. Is that right? Or you took some…you had some other sources of income other than the investments that you actually put in after you quit?
Jeremy: No, no, no. This was all about compounding and reinvesting it. And again, you know, I know it’s probably not the right form to get into, but I had some non-real estate investments as well that actually did tremendous amount of compounding for me over about an eight-year period. So it was a mixture of a lot of different things. But at this point, I’m almost…I’m probably over 95% real estate owner. That’s a real number, but it’s mostly real estate, with a dabbling of a couple things here and there.
Pancham: Got it. So you know, it’s fine. I mean, what was it…if you can talk about it real quick that where you had a lot of compounding with it?
Jeremy: Sure. I mean, I’ll give you an example. Because it’s the best example I have. And it’s not the only one but a friend of mine, for example, was and it’s going to sound a little old because now it’s like, you know, the Amazon cloud and everything but a friend of mine started a company and today thousand two that was a web hosting company where he actually he rented space in locations that were meant to have servers. I’m completely blanking on data centers, data centers, thank you. So you would he would rent out space in a data center. And he actually created his own kind of private networks for companies and he co locate them in different areas. So he came to me one day, and he showed me at least that he was doing with Dell. And he said, listen, I’m a small business. It was 2004. I am going to have to pay a 28% interest rate to lease these servers. Do you want to just do it yourself to make the 28%? And I said, you know what? I know, I know him very well. I want to make a bet on this specific person. His family kind of personally guaranteed it for me, and they were very wealthy and very nice. And so eight years later…you know, the way that a 28% interest rate works was that we had a 28% interest rate with a 5% buyout over a three- year term. That’s a 50% cash on cash payout per year for three years plus the 5% buyout. So was heavy cash and I was reinvesting, reinvesting, re-compounding…So when you start combining those types of numbers with the amount of money I put into it, it really made a huge difference.
Pancham: Wow, that’s pretty awesome. Thank you for sharing that. That’s, that’s pretty awesome. And given that time, that was pretty good idea to do that. So, you know, at this…let’s talk about post 2007. And I’m sure like the amount of number of asset classes that you mentioned, they’re like hyper…hyper diversified. So I want to touch on two questions for you. Number one, like what do you look for in the operators who are actively managing your investments like in this instance, that the example you gave your friend you really knew him for a long time you trusted him, you knew his family and background and everything. So what do you look for in the operators now? And second question is how many different number of operators have you worked with since 2002? Or maybe 2007?
Jeremy: Yeah. Okay, so let me let me answer the second question first, because it’s going to be much more quick. So the second question, which was how many operators I’ve invested with, I honestly don’t know off-hand the exact number. I mean, I can tell you this. I’m in over 70 LLC’s right now. I’ve been in over 30 sales in the last three years alone. So it’s a lot of different operators. There are some who invested with one operator investor with over 20 times since 2002. Another one I can think of right off the top who I invest with at least 10, 15 times. So some of them are more than others. And some of them are much…you know…I probably have a number of operators only invested in once or maybe twice. So it’s all over the board. I don’t know the exact number offhand. So yeah, how do I decide so high level because we can spend a lot of time on this but high level, the best way to describe what I look for is I’m looking for a conservative operator who is looking to under promise and over deliver based on conservative projections, who’s experienced, who has, you know, many years of experience in the asset class in the space who’s focused typically on one or one asset class, preferably, maybe two. But I prefer one strongly. And I’m trying to avoid someone who’s aggressive, is kind of marketing their opportunity with high numbers and making it look good for investors. But we’ll likely over promise and under deliver and won’t really care because maybe let go markets and more investors the next time. So at the very highest level, that’s kind of the difference in what I’m looking for. And what I will say is that I consider the operator to be even more important in the opportunities. So clearly, the property you’re investing in is very important, right? So it’s a very close second place, but I really believe who you’re making a bet on is just a little even more important in the property itself.
Pancham: Yeah. So you’re betting on the jockey rather than the horse?
Jeremy: Yes, that’s exactly right.
Pancham: Okay, great. So and then this would lead into a question and I’m sure a lot of listeners might be thinking this is that how do you figure out what Like you in person, like for yourself, whether it’s conservative, and, you know, number projections, or whether it’s aggressive number projections, is it just by experience or by educating yourself? Like, how do you do that?
Jeremy: Yeah. So there’s two ways that I go about trying to figure out if someone’s conservative. One is actually the numbers. And two is actually what I call reading between the lines. And so the numbers are fairly obvious, right? So meaning fairly often that you can look at numbers and try to figure out if they’re conservative or not. So some of the stuff that I look at, for example, and either just the obvious high level ones is what prices somebody’s paying. What cap rate…what does the cap rate look like? Are they’re being conservative…even how they’re purchasing it as far as negotiation and what price they’re paying? All the way down to like, what is the average revenue inflation assumption per year in terms of rent increases and revenue increases? What is the average expense inflation per year? What type of reserves is somebody holding? What type of expense ratio are they assuming and of course, each asset class is going to be? Difference.
Pancham: Right. Right.
Jeremy: And what type of sale price? Are they assuming at the end to make the numbers look good or conservative? You can do either how well did they actually assess the comps first sales and for rents? How thorough were they? Those are, you know, some of the way you can look at some of the numbers. And there’s obviously we can get into like more detail about that. But on the reading between the lines, which I think is very important, you know, I look at different I read the offering memorandum, or the executive summary their business plan very carefully. And what I look for is verbiage that kind of hints whether somebody is conservative or not. So, I’m going to give you some obvious examples just to make the point. So if somebody says, Well, this building is you know, I’m reading the property is 100% occupied, it’s been 100% occupied for the last five years, the markets growing very well. You know, the projected household formation growth, the projected average household income, all that stuff is going in the right direction. Okay, so it’s a really strong market, really strong location. Well performing property. And then they say, even though the property has been 100% occupied for the last five years, we’re assuming an 8% vacancy rate to be conservative. Okay. So that’s like an example of like reading between the lines. And yes, it’s a number, but it’s more the concept that they’re actually presenting it in the writing. Okay, they’re presenting to you. They’re being conservative. The flip side of that is, somebody’s buying a property in a hot market that’s been hot for maybe a year or two, and is assuming they’re going to have rent increases for the next six years, or 5% per year, because there’s projections that this markets going to continue to be hot. It’s like the next best place, right? So for me, the philosophy is different between those two people. And I’m trying to find a person who’s got the same philosophy that I do. So I’m kind of lining up well to match that I’m on the same page with them. I’ll give you another example actually which doesn’t even doesn’t even require an executive summary or any numbers right. I try to explain to people…look at the number of deals that somebody did and acquired in 2019. Okay, in a time where I thought we were at peak pricing, and I was on the sidelines for a number of years already, there’s almost like an inverse relationship between how many deals somebody did in 2019. And whether I’ll likely ever invest with them. And I don’t say that in a bad way. Just we have a different philosophy that a different opinion about where the market was, or maybe they do more value add that I’m willing to do. There’s some reason why I was doing very few deals, and they were doing a ton of deals, I was investing in very few deals, and they were doing a ton of deals at that time. And probably they’re not in alignment with my philosophy. Right? So that’s a very important point, I think, because you got to remember as a passive investor, once you give your money and you’re in a in a liquid investment, I’m not a financial advisor or investment advisor. So anything I’m sharing here, just my perspective as an investor. But when you went to hand your money over to that syndicator, you’re trading control for diversification. That’s my opinion as a high level, right?
Jeremy: You’re also benefiting from someone’s work time, effort, credit and many other things. expertise. But really, for me, it’s trading, you know. Control for diversification. So I’m giving up control. You’re going to give control to somebody, you’ve got to understand who you’re making a bet on.
Pancham: Got it? Got it. No, thank you This is, this is great information. And I can relate to a lot of that myself. And you know, I’ve been investing passively not as long as you are, but I’ve been investing since 2015 with other people. So I totally get it. So let’s move on to like, you know, what kind of returns do you look for? Not talking about this year or like in general, like starting 2007? Like what made you like, what would you say is a good return for your money?
Jeremy: So, I have an interesting philosophy about this. So you know, what I did in this past cycle, and I’m going to call it the past cycle. Now the cycle that I think just ended, you know, in March of 2020. We’re talking in March of 2020. So I could be wrong, right? But this cycle that appears to have ended. I basically add a specific cash flow target. And what I did was that as the cycle went on, if I wasn’t able to achieve that level of cash flow and a typical market rate deal for that specific asset class, I would stop investing in that asset class except for unique pricing and just continue on the others, right? Because I was open to any asset class at the beginning of cycle back in 2009. And so, my plan, and I’ll tell you what those numbers were in a second, but my plan is to reassess where things are going to be once the cycle resets that. we’re in the middle of resetting right now, what that new cash flow targeting cap rate target is going to look like…that’s kind of a fair target, you know, to represent a really fair price like market rate. And then I’m going to start doing the exact same thing. I’m going to target the same cap rate roughly across a lot of the asset classes, or at least a market rate for each asset class which is obviously sometimes very similar across asset classes. And then as the cycle matures, as I can no longer achieve the cap rate and cash flow targets, I’ll drop off those as that happens, and then eventually I’ll be on the sidelines. So, in the past cycle, I was investing in class B properties in kind of a B market or a minus market. So not in a prime A market, and in non-volatile markets that were more stable. Nothing sexy necessarily. And I was looking for 9% cash flow projected net to investors. And 11% average annualized cash flow projected net to investors across let’s say, a 10-year horizon…okay, 10 year projections. That wasn’t a fully amortized loan over let’s say, a 30-year amortization. And those are my targets. And by keeping to those targets, I think it kept me out of trouble because, by definition, the reason why cash flow becomes too low is because the property prices are going too high. Right? That’s what got me onto the sidelines. They got me out of asset classes as a cycle went on. My plan is to do a very similar thing, but what I can’t answer for you right now is what my new cashflow targets are going to be because I don’t know what’s going to be realistic. I think it’ll take a year or two for me to figure that out. Now, my hope is that I can get back to levels that are somewhat similar, but probably a notch down because interest rates have structurally come down over time. But I’ve been discussing this topic with a lot of experienced investors…figured out what my targets should be. But I realized I think it just too early because until we see price discovery and where price is going to go. I don’t know what the cash flow targets should be to be fair, because I don’t want to create a number that’s unrealistic for myself or I’m never investing anything I got to be realistic about where the market is, but also want to make sure I protect myself and don’t invest at a price is too high right now, especially now, as prices are going to start to adjust.
Pancham: Got it? Correct. All right. No, that’s great. My next question like for given your experience over the years now? It’s a long…you have a great great, you know…you’ve seen one full cycle and you’ve also seen the.com bubble for stocks. We are in the middle of reset right now. Wi Fi. I believe that too. So is there any downside other than the illiquid side of things that you mentioned of passive investing passively?
Jeremy: Yes. So here’s a very important thing to consider. If you’re brand new to this type of investing, let’s say, and you’re considering what to do. The first thing I always tell people just in terms of brainstorming, and helping them is, it’s a personality fit. So some people want to be passive. They’re too busy with their job like I was and they’re comfortable giving someone else control. Other people, maybe they’re too busy with their job, and they want to be passive, but that the wrong personality and they’re not okay, giving control to somebody. That’s not problem. Everyone’s different. Just you have to understand that whether you’re active or passive is partially due to your personality. And I think it’s very important to consider that before you figure out which path you want to go down because what I tell people is look, either way, passive or active. You’re going into an illiquid asset on the real estate side, right? You can’t go press sell on your screen and get your cash in three days like a stock market. So the problem with going down either path and then realizing you made a mistake is the following. Let’s say that I go down a active path, and I’m brand new. And I go into 2, 3, 4 opportunities… okay, and I stop, and I say, I’m going down the wrong path, I got to turn around, go back, and I’m going to go down the active path. Now, instead, I’m just not comfortable giving control to people. The problem you have now is that you’ve got two problems. One is that in order to go down the passive path, you’ve got to end up properly diversified. That is absolutely key, right? Because you’re draining control for diversification. I like to find people across asset classes, operators, and geographies. Those are very key things. And so you want to avoid the Bernie Madoff problem where, you know, some people had all their money with one person, right? So just as an example. So the problem you have is that it’s very hard to sell your shares and these opportunities on the passive side. It’s actually legal for the first year from my understanding to actually sell your shares for the SEC, then it’s still hard to tell if you got to find a buyer. You may not be able to find the price you want. It’s a very illiquid market. And so you’ve got a problem where like, you can’t necessarily backtrack easily and get your capital out. And if you can’t get your capital out, then you’re only in 2, 3, 4 opportunities… Now you’re not properly diversified across any of those items I just mentioned. Right? So you have more exposure and more risk for the same return that you would have, had you’ve gone down the path further more theoretically. So this is an important topic that people need to think about in advance and make sure that the personality is lining up with the approach that they take. I think that’s a very important thing to think about.
Pancham: And that’s great. I actually did a whole show on just that topic, and what you need to think about when you’re investing passively, and those were some of the things that came out. So thanks for sharing that. Is there anything else you want to add to what we just discussed overall before we move on to the next section of our show?
Jeremy: No, I here’s one thing I’ll just say, for those of you who are new or even if you’re experienced at this particular timing that we’re recording this with the stock market going down everybody uncertain. You know where prices are going to go etc. I just want to remind everybody, that real estate pricing moves very slowly. And I am assuming that it’s going to take a year or two for us to kind of hit bottom and I could be wrong. But typically at the end of the cycle, it takes a year or two for prices to adjust. It takes a while for sellers and buyers to come to an agreement on price. It’s called the bid-ask spread that has to close up. Sellers need to realize that the whole tide has shifted, and that buyers are going to want to have lower prices now. And so when people ask me…okay, well, everything’s going crazy right now, what are you doing? I tell people like nothing. And when they say what do you mean by nothing, I say, well, like if I’m going to invest in something in 2020. Right now, I have to get 2021 or 2022 pricing. Because if I don’t do that I’m not protecting myself. So unless I find an opportunity that has 2021, 2022 pricing, whatever I think that means to protect myself. I’m going to wait till 2021 or 2022 to actually invest, right? Furthermore, you’ve got to wait to see which properties have occupancy problems, etc. And unless you let that time pass for the next few months, you won’t see what’s falling apart. No one’s holding up well. So if you’re an investor out there, I would caution you to be very careful right now. Yes, there’s probably going to be some deals come up in 2020. But I would be very cautious about the pricing specifically, and as well as about the realistic notion of whether or not the current occupancy rates going to fold into this recession. So I am planning on staying mostly on the sidelines until 2021. With the odd exception, you know, there’s always unique opportunities and they come up and you should take advantage of them if you think they’re right. Otherwise, be very careful right now and just know that there’s no rush, and that you will get great deals next year in the year after, and you’ll probably have a much better idea that you’re getting into a deal at that point. Whereas right now, you can’t be sure. So just be very careful right now.
Pancham: Thank you for sharing that Jeremy. So we’ll be back after this message. If you are an accredited investor, and have been thinking about putting your money to work for you, then I have good news for you. I have created an investor club. which I call the Gold Collar Investor club. I will be putting together investing opportunities exclusively for the group. These are the opportunities where I have done the due diligence for you and will be investing my own money alongside you. If you are interested, please sign up on thegoldcollarinvestor.com/club. I repeat thegoldcollarinvestor.com/club. I will reach out to schedule a 30- minute phone conversation to discuss your investing goals. Once you sign up, this can be a good opportunity to diversify and take some chips off the hands of Wall Street to produce some passive income. And in case you were wondering, what is an accredited investor? An accredited investor is someone who has earned more than $200,000 as filing single or more than $300,000 filing jointly for last two years. Another way to qualify as an accredited investor is if your total net worth is more than $1 million, excluding your personal home. It includes your stocks, 401 K’s, IRA’s, cars, etc. Just not the equity in your personal home. If this is you, I would highly encourage you to sign up.
Jeremy: Hi, this is Russell gray, co-host of The Real Estate guys radio show and you are listening to the gold collar investor podcast.
Pancham: All right, so let’s move on to the next section of the show which I call taking the leap round. I asked these four questions to every guest on my show. My first question for you, Jeremy is when was the first time you invested outside of Wall Street?
Jeremy: So that was back in I think it was February of 2002. If I have the date, correct. That was my first investment into a real estate syndication.
Pancham: Oh great. So actually before we go to the second question, can you just quickly tell us like, what was the deal? Like how big and it were probably in Canada?
Jeremy: Absolutely. So you know, it’s funny, I have to go back and look at which one it was because I made so many investments account over the next years. But I will say this. It was actually with lifelong friends of my family who I’d known literally for decades. And luckily for me, I knew I could trust them, I can learn from them. And that’s actually why I started with them specifically, and just a very unusual situation that I was in to be able to do that. It was almost certainly either office or retail property, because that was their focus and asset classes. It was definitely in Canada, but I hate to say it. I can’t remember. I have to go back and look at my notes as to which…well, first of all, I’ve been in so many by now, I don’t know. Okay, but I know fear and I hate it.
Pancham: Yeah, thank you. Let’s move on to the second one, which is…what fears did you have to overcome when you first invested outside of Wall Street?
Jeremy: Yeah, you know, like everything else, you have fear of the unknown. That’s just a normal human instinct that is very hard to shake off, no matter what it involves. And so, for me, I have a bit of an advantage because it was easier for me to dip my toe in a couple reasons. One is because I was investing with lifelong friends and my family, which is obviously unusual. So I knew that I was making a bet on good people. And that was very, very key. And it wasn’t like I was trying to assess some person I don’t know. So I had a very, very lucky and that I had that. Also, my grandfather had been involved in real estate for decades. And unfortunately, I never really got to do anything with him as far as like getting involved with what he was doing. But I definitely understood over the years that real estate can be a great source of cash flow, because like me, he was very low risk. And so I also had that helping me to dip my toe and kind of overcome the fear. But truly, it was because I had that person I could make a bet on who I knew really well as a starting point. That was a really good way to start.
Pancham: Okay, so my next question is, can you share with us one investment that did not go as expected?
Jeremy: Yes, great story. It’s got to take a few minutes if that’s okay, but again, and you know, I like tell people, you know, I can tell you 20 ways a deal can go bad…no matter how good it looks at a time… there’s just so many ways to deal and you can’t predict them. So you got to be prepared when you invest in these types of opportunities that there’s a 1% there’s a ton of what I call 1% risks. Some of them…maybe we’ll think about some of them…you won’t be able to think about in advance. That’s the reality. There’s nothing doesn’t have any risks. Right? So I invested in a in a 303 unit, student housing apartment building first property across from a state university campus in Michigan in January of 2008. I went into this property thinking there was going to be economic downturn and frankly, I even specifically handpicked that because of the fact that I thought that okay, well, when we have a downturn, people go back to school to get more skills. And so there’s going to be a lot of continued demand a really good location and probably most importantly, very experienced sponsor. I think it was our 16th or 17th property. Okay. So it wasn’t University Michigan. Now I’m actually forgetting. Yeah, I forgot the name of University at this point. But if anyone’s from Michigan, they probably know what school it is. So yeah, long story short is that everything went great, very worked out. We were like, hundred percent occupied for the next few years. But fast forward to the beginning of 2012. So for those of you who have no student housing, you know, the one odd thing about it is that it’s on a very specific schedule to lease up right. So you’re leasing up before August, typically, and you’re either going to do well or not do well. And that will kind of dictate how you’re going to be for the rest of year because very few people are looking for rental student housing apartment in January, right. They’re already in school for that year. So come spring, I think it was 2012. So I should take a step back and say part of the deal that we got a really unique pricing on was that we assumed a loan that was due in the fall of 2012. Okay, and it was a really great deal as a result of it. So in the beginning of 2012, everybody gets a letter from the city including us and all this tenants saying, Listen, this summer, we’re going to close down the bridge to school after school is done to make repairs on it. But don’t worry, it’s going to be open for the fall season. Like we know, this bridge has to be open for you to access campus when you come back, so don’t worry. No problem. Right? Right. Well, next thing we know, people are worried and they don’t know if the bridge is going to be open in time. And so the occupancy goes from 100% roughly to 65%, roughly. Okay. So the thing is, is that we wouldn’t probably be able to break about even and not have an issue and to kind of get through a year without cash flow. But then that’s the first domino that fell, right? The second domino that fell was that our loan was due that fall. And then the third domino that fell is, of course, you go get an appraisal for the refinance of the loan at a 65% occupancy rate, and it’s just not going to pencil out to refinance to cover the previous loan. So that that was a third domino that fell. That fourth Domino that fell is that the bank took a look at this scenario and said, well, you have a great property. It was going to be 100% occupied next year. I want this property like, and I’m not going to extend the loan for a year.
Pancham: Oh my god, really.
Jeremy: It was the fourth Domino. And it’s the only foreclosure I’ve ever been in, in real estate. And so what’s so interesting though, and what we were talking about earlier is that so of course, that was completely unforeseen. Nobody could have seen that coming and it was a, you know, 1% risk that I’m talking about. But what’s really unique about the story and how it ended is that the operator that we invested with was actually owned most of their properties themselves and only syndicated a couple opportunities. Of course, they’re very high net worth. And they felt really bad for the investors. So what they did was not only did they have a partial recourse loan in the payout on, but they actually took everyone’s equity and transferred it to another property they own themselves with no investors from across from a third State University in San Marcos, Texas. That was the first property across from campus is similar scenario. So it took about a year from a legal and accounting perspective for us to get transferred. So I had no cash flow for a year. But then I’ve been in that property ever since. Till today it is doing really well and fully occupied, or close to it and doing really, really well. And so, you know, there’s a lot of lessons to be learned there, right? There are always 1% risks. You can’t force…you have to be prepared to understand that going into any opportunity that can happen, you’re making a bet on this case was absolutely key. More important than the property itself because I made a bet on someone who had enough net worth. So to speak, to be able to fix the problem or help investors and then most importantly, even though they had the net worth, they actually chose to help investors because they have no legal obligation to do so they just felt that so there’s a lot of lessons there that are very interesting for many and we there’s more lessons even went away over time, but that’s kind of an interesting, unique situation where the deal didn’t go as planned, but actually ended up having a very good ending.
Pancham: Yeah, yeah. No, it’s great that they obviously were in a position to help and they did choose to have it Create, and that’s where you’re initial calm and that you’re betting on the jockey rather than the horse. Both are important, but jockey is more important than the horse. Yes. No, that’s great. Thank you for sharing that. And I’m sure you learned a ton from that. And you’ve changed…Did it change your investing criteria after that experience?
Jeremy: I did it. I mean, so there’s two things that I would say that I focused on as a result of that story, aside from massive diversification, because that’s obviously going to help in that type of scenario. One is I have a preference for making a bet on higher net worth operators. If I have a choice. It’s not something I necessarily look for, but it’s a plus. Right? Because what I’ve learned over time is that they can help if they choose to, whether it’s that you know, we need a short-term loan for 100,000 or 100,000. there to do this work, there wasn’t forcing it can’t be you know, having the reserves which would then result in not having to do the cash flow. For example, you know, and again, there’s no guarantee they’ll actually provide that. But if you have the right person, there probably will probe. So that net worth piece is kind of nice to have, but not mandatory. And I would say the other thing is that look, I’m looking for predictability. So one lesson I learned from that is that, you know, we only had four and a half years left on the term of the loan, which actually really isn’t that bad at the right point in the cycle. So, but the longer the term of the loan, the better for me in that that kind of ends up locking us into a longer-term deal with more predictability in it. So I tend to favor longer term loans, especially at certain parts of the cycle as a result of going through that process. Because let’s face it had the long term the loan been longer that we took over, and I paid more attention to it, we would have avoided that now. It’s still going to happen at the year that was due, right, exactly three years later, but what the difference would be that, you know, say that that was a 10 year loan that we assume, for whatever reason, then would have had 10 years of cash flow by then and if we got foreclosed on, there wouldn’t have been an operator doing all this other stuff. For the investors, I probably would have been in a better place having gotten more years of cash flow from it by them. Right, right. Yeah. And that’s not a strict rule. Like I still look at a five or seven-year term, depending on the situation. And sometimes it’s easier and easier, but it’s actually an advantage to have a shorter-term loan in certain ways. But overall, for someone who has more of a stabilized cashflow mindset, the longer-term loan is a better option for me right now.
Pancham: That’s great. So my final question is, what is one piece of advice would you give to people who are thinking of investing in the Main Street, that is outside wall street?
Jeremy: What I would say is that take it very slowly. And I’m not just saying that because of the timing right now. But it happens to be this is a fantastic time to start, not just because prices are about to adjust, but you need to take some time upfront to actually learn carefully. And you want to make sure that when you’re going to go into your first deal, you have a high level of competence to understand it, have a lot of confidence in a job because you understand how it works, what the numbers mean, and that you know, it’s something you know, you need to get into based on understanding a lot of different aspects of it. I would tell people to hold off jumping in until they have a really good understanding of an asset class and you can probably bet it properly get an opportunity. And the reason why I mentioned time is good now is because you could spend the next year right now learning about a specific asset class and not really missing out on much because the prices are still adjusting, and then dive in, in a year or two, when you have a really good understanding, and you really know or understand what you’re getting into and the price has happened to but destined to a better place. So there’s really great timing right now to start and to start learning. But don’t go into an opportunity unless you’re 100% comfortable because of lack of liquidity, right? Once you invest, there’s a lack of liquidity. And you’ve given someone else control. That’s a very important point.
Pancham: Right? Oh, thank you for sharing that you’ve added a ton of value to my listeners and how can they reach you if they want to connect with you?
Jeremy: Sure, absolutely. Please feel free to reach out to me. I welcome calls with either new investors experienced investors and network new investors and we just want to brainstorm if I can help anyway. sponsors or syndicators, you know, I’m always looking for opportunities, even investor groups I’m always happy to network with you. My email is the best way to reach me which is email@example.com.
That’s great. Thank you, Jeremy for your time today. It has been awesome. Your experience, I’m sure is going to help a lot a lot of people and they want to be in a position where you were in 2007 and basically live off passive cash flow.
Pancham: Thank you. No problem. I hope the episode was helpful for your listeners. Yeah, it is it is I will give you feedback.
I hope you guys enjoyed what Jeremy had to share. This is a dream that most people are trying to achieve and this is a proof that it can be done. I really appreciate you joining me today. Thanks for listening questions email me at firstname.lastname@example.org. Until next time, take care.
Thank you for listening to the gold color investor podcast. If you love what you’ve heard and you want more of Pancham Gupta, visit us at www.thegoldcollarinvestor.com and follow us on Facebook at the gold collar investor. The information on this podcast are opinions as always, please consult your own financial team before investing