5 Things Passive Investors Look For in a Syndication Deal and the Operator

11/07/19 • 19 min

Commercial Real Estate Investing From A-Z

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.
Read this entire interview here: https://montecarlorei.com/5-things-passive-investors-look-for-in-a-syndication-operator-and-the-deal-itself/
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.
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.
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.
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.
Jeremy Roll
[email protected]

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Previous Episode

From Food Stamps to Millionaire Real Estate Investor: How a Single Mother Did It

Today we are interviewing an incredible woman, Heather Self, a multi-millionaire real estate investor that literally came from nothing. I am incredibly humbled to interview her, she was a single mother of FOUR when she started her journey into real estate investing.
You can read this entire interview here: https://montecarlorei.com/how-a-single-mother-of-four-went-from-food-stamps-to-millionaire-real-estate-investor/
I am so excited that you are here to share with our audience how you started from zero, or maybe negative, why don't we get started with how you got into real estate?
To make a long story short, otherwise we'll be here for three weeks, I'll start by saying that I got married directly out of high school. My first husband and I had our daughter and, shortly after that, I found out that my husband was using drugs. I then decided that my kids are not going to be raised like this, that this is not the lifestyle and things that I want them to know and be privy to. At the same time I also got an eviction notice on my apartment door. Keep in mind that I'm 18 years old at the time. My car was repossessed, and found out that my husband had robbed my boss at the time. I ended up losing that job too. Within a 48 hour period I had lost my job, my car, my apartment, and found out that my husband was on drugs and I was pregnant with my second child. Now I look at my calendar, and if it looks crazy for 48 hours, I don't worry about it. If I can handle all of that in 48 hours, I can do anything. Luckily, I had a wonderful, supportive family. And they told me to move back in.

I was able to take that time and rebuild myself and figure out what I wanted out of life. And since I was pregnant, it was really difficult finding a job, and I was in the middle of all this turmoil, so what do you do? I got to the point where I didn't see any other way out but to receive welfare benefits, I had to get on food stamps, and they started offering some classes with the Welfare Reform Act. These were called Fresh Start classes in order to receive the benefit of $185 per month. The positive with that, though, is that they were offering these classes. I couldn't work at the time, so what better way to take time off and go get a different perspective. Maybe get a paradigm shift. I needed to get out of that because I knew that's not how I wanted to raise my family.
Did you need a downpayment for that?
You do need a down payment. You have to have very reasonable credit, which is also something that I was working to fix. I had already made up my mindset that I don't want to be that person that depends on somebody else for my independence, or for my children's future, or what I'm going be able to offer. That was the first time that I said "This is my responsibility and my responsibility alone to get out here and make this happen". You have to have a job for a good amount of time. You have to have decent credit. You have to have a down payment and you make mortgage payments. It's not a free house. That's a big common misconception. It is something that you have to qualify for, and very few people qualify for that. In the summer of 2001, we started building and we moved in shortly after. Going through that process you start to see that all these choices that I felt were kind of stripped away, I now had control over. And that's what that program is able to do. And that's why I'm a contributor and a donor to it now. It's very important to my life's work and what I want to do.
Heather Self
www.heatherself.com
[email protected]

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Next Episode

Pros and Cons of: Retail / Office / Self Storage / Mobile Home Parks

In this episode we will learn the pros and cons of investing in a few asset classes: retail, office, self storage, and mobile home parks. We are interviewing Jeremy Roll, a passive real estate investor since 2002.

Read this entire interview here: https://montecarlorei.com/passive-investing-retail-vs-office-vs-self-storage-vs-mobile-home-parks/
What are some pros and cons of the following asset classes: retail, mobile home parks, self-storage and office?
Retail
What I don’t like about retail going forward is what’s going on in the next 10 years, as far as predictability. Some of the challenges that I see, some of them are continuing and some will be in the future include: are people going to continue to go stores or are they actually going to migrate online even more and more? And if the answer is online more or more, what does that mean for the retailers?
Mobile Home Parks
I love mobile home parks. And the reason why I say that is because if you do your research, you’ll find that it probably has the lowest turnover ratio in terms of tenancy of any asset class I can think of. I believe the national average turnover ratio is about 9%, which is very low. There are certain apartment classes that have 40 to 60% turnover, depending on the type of building and location. I love mobile home parks because of that. And I love the fact that they’re serving lower income people, and that I see a need for lower income housing and affordable housing for a very long time going forward. So there is that predictability that I was talking about. There is predictability of demand. Predictability in lack of turnover in terms of cash flow. And, if you buy the right profile, which is very important, where most of the tenants are owner occupied and not renter occupied. You’re probably going to have more predictability in terms of having less problems.
Self Storage
That’s another asset class that I really like. When you think about how the US is changing from a demographic profile, we’re aging over the next 10 years. We have a lot of people moving, and projected to move to Florida and to Texas to retire. What I love about self-storage is that when people retire, they typically downsize. And I see that there will be a need for self storage as a result when these people move, or even if they’re living there and they downsize. In certain locations, I think they can be great. One of the challenges with self-storage is that it’s very low cost to build and it can be built relatively quickly. The barriers to entry are low. If you’re going to invest in self-storage, the supply and demand factors in the market you’re looking at at the time are critical, because you may have a competitor pop up in a year or two that you weren’t expecting.
Office
I have multiple office investments right now as well. But I have the same challenge with office that I have with retail, for a couple reasons. And we didn’t get into one aspect of retail that’s a little bit of a predictability challenge, which is the same in office, which is tenant improvements. When you have a tenant that leaves, typically there’s some money to be spent to turn the unit around and make it ready for the next tenant. In retail, it can be quite substantial if they’re changing the entire use. Let’s say you have a record store that’s being turned into a restaurant. There’s a lot of money that has to go into that. And often you’re sharing that cost with the tenant upfront. The same thing goes with office. Between the tenant improvement requirements that may come up if you have tenants leave unexpectedly, that may come out of cash flow or reserves.
Jeremy Roll
[email protected]