Episode 56: Jeremy Roll – Active vs. Passive Investing Which is Best

show Jul 27, 2018

 

Jeremy is a passive cash flow focused investor who has had a focus on real estate since 2002. He wanted the predictability of steady cash-flow instead of the ups and downs of the stock market. He diversifies across operators, geographies and asset classes.

He moved from Montreal to Pennsylvania in 2002 where he attended university. Afterward, he moved to Los Angela’s where he worked for Disney. While working, he decided to invest in cash-flow assets that eventually gave him the flexibility to leave the corporate world.

Jeremy defines his view of active versus passive investing. For him, the difference is centers around direct control of assets.

Passive investors generally do not have a direct say in the investment while active investors own, control and direct assets. He discusses the pros and cons of investing passively versus active investing. Passive investing runs slightly higher risks of fraud as you usually have little control.

As an active investor, it’s more challenging to be broadly diversified, and you usually have to rely on your own credit. Active investors are more likely to be able to get tax breaks as the government considers the investor to be more involved in the business. If you can qualify as a real estate professional that can be very advantageous.

His preference is for passive investing since it gives him the flexibility to diversify across operators, geographies, and asset classes. This would be hard to do as an active investor because of the difficulty of being an expert in multiple assets.
Mr. Roll is currently invested in self-storage, mobile home parks, office, student housing apartments, startups, single family homes and oil & gas. These are all passive investments. His strategy is to learn enough about each asset class that he can determine who is the expert sponsors in that asset class and invest accordingly.

He discusses what he expects for preferred returns and investment splits. You want to make sure sponsor is making reasonable forecasts and the amount of work they will need to do in an investment. You want to make sure that you are getting paid enough for the risk versus the reward. Passive investors can get depreciation flow-thru and sometimes you can take advantage of a loss.
If you are looking for opportunities, talk with other knowledgeable people. A lot of the passive opportunities are not publicly marketed and many of the opportunities you will learn about from in-person networking. Passive investing is a team sport. Crowdfunding sites offer an excellent service as they help connect sponsors with investors however they take a percentage.
Look for sponsors that are conservative and those that are striving for a long-term business relationship. They should be experienced. Look for those with a proven track record of multiple deals. Review opportunities and examine their underlying assumptions. Make sure they are conservative and then ask questions. Their answers will usually reveal how conservative they have been with their numbers. Jeremy won’t invest with a sponsor unless he has met them in person and uses that as a final gut check.

Some immediate red flags are low preferred returns and if splits are below 50/50. He examines the cap rate multiple that they are paying for the underlying asset. You want to make sure they aren’t overpaying. It’s one of the easiest ways to weed out potentially bad deals.

He discusses blind pools which are a fund that doesn’t have any properties yet. You’re entering without knowing exactly what you’re investing in. There can be some benefit if there is diversification across geographies and if you trust the sponsor’s abilities.
If your someone who needs to be in control then avoid passive investing. You need to be able to sleep well at night, and if you can’t get comfortable, then you shouldn’t invest this way. With passive investments, there are restrictions on selling, and generally, you are locked into a contract for a year or more.

It’s a dangerous time to invest right now as asset prices are high in this market cycle. You have to look very carefully right now and invest with caution.

Talking Points From This Week’s Episode
• He diversifies across asset classes, by region, and by operators to reduce risk.
• The Advantages of passive vs. active investing.
• Make sure sponsors have a good track record.
• Real estate market is currently very bubbly and now may not be the time to invest.

About Our Guest
Jeremy has been an active real estate and business investor for more than 16 years who left 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 over $500 Million worth of real estate and business assets. As Founder and President of Roll Investment Group, Jeremy manages a group of over 1,000 investors in the US and Canada who seek passive/managed cash flow investments in real estate and businesses. Jeremy also co-founded a non-profit organization called For Investors By Investors (FIBI) in 2007 with the goal of networking with, learning from, and helping other investors. FIBI is now the largest group of public real estate investor meetings in California with over 25,000 members. Jeremy is originally from Montreal, is a licensed California Real Estate Broker (for investment purposes only), has an MBA from The Wharton School, and is an Advisor for Realty Mogul, the largest real estate crowdfunding website in the US. Jeremy welcomes e-mails

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