In this conversation, Terence Critchlow shares his journey as a passive investor in real estate, discussing his portfolio, investment strategies, and the importance of education for limited partners (LPs).
He emphasizes the need for investors to thoroughly vet operators and understand their investment thesis. Terence also highlights common mistakes made by new investors and introduces his passion project, MBC, aimed at raising awareness about alternative investment opportunities beyond traditional stock markets.

How to Pick Sponsors and Invest for Cash Flow with Terence Critchlow

[00:00:00] Pat: All right, Terrence, thank you very much for joining me. Before we really jump into it, why don't you take about 30 seconds, introduce yourself and, yeah, we'll get into it.

Terence Critchlow: All right, thanks. I'm really excited to be here, Pat. I appreciate you inviting me. My name's Terence Critchlow. I am a passive investor. I have been investing in [00:01:00] syndication deals for about six years now. We've got about 12 LP deals that I'm involved with. Before that, and long before that, I've been a more active real estate investor.

I've been doing single family, very small multifamily, or vacation rentals for over 25 years. I still have a couple of single family rentals that I've got kicking around, but for the most part now, I'm a passive investor. Outside of my investment career, I've been in the tech space. I worked at Amazon for the last decade as a technical program manager, basically herding the cats of software developers to deliver cool things for the website.

Pat: Yeah, no, I feel that. I feel the herding of the cats. Even I feel like I'm not herding the cats, but I'm also one of the cats. So it's sort of interesting as we build this. No, that's fantastic. So you are right now—are you moving more away from the active stuff? Are you strictly a passive investor? Is that what the go-forward looks like?

Terence Critchlow: Absolutely I am. I'm at this point and for [00:02:00] the last couple of years I've been strictly passive, other than the couple of SFRs that I've got just sort of hanging on for good luck. All my new investments are passive.

Pat: Good stuff. And you are still—it's not like, "Hey, I've got my portfolio, I'm living on it and I'm managing it." You are still actively making placements and looking for more?

Terence Critchlow: I'm actively making placements as funds come available. Since I retired from Amazon last year, that's not as regular a cadence as it used to be, but yes, I made a placement earlier this year.

Pat: Well, great. Very cool. First of all, congrats on your retirement. That's incredible. So talk to us about your portfolio a little bit. How is it currently performing? Is it mainly in one asset class? What does that breakdown look like? Tell us a little bit about that.

Terence Critchlow: So I'm a little diversified. I've primarily focused on self storage, mobile home parks, and [00:03:00] notes for my investments as far as the dollar value goes, but I've got a little bit here and there in a variety of different things. I've got an oil deal that I went into at one point.

I've got some car washes. I've got an ag deal in Paraguay that's out there. An ag deal, an orange grove in theory.

Pat: Very interesting.

Terence Critchlow: That's actually the one deal out of the 12 that I have no idea how it's going. The sponsor's one of those guys who just has no communication at all about what's going on. And so I don't know if I actually have oranges or not. So we'll see how that goes. But other than that one deal, things are going pretty well. Six of the deals are performing basically according to expectations. [00:04:00] Four are below expectations, but we still expect that they'll do okay over time. Cash flow's not where we want it to be, but the deals are moving forward and it looks like at the end of the day, we should still get close to what the projected returns were. And then one is—I just got into earlier this year, so it looks like it's going fine, but it's really too early to tell.

Pat: Sure. And how are you finding these opportunities? Mainly an orange grove in Paraguay—I would love to hear how you came across that one. I've heard a lot of things; I haven't heard that one yet.

Terence Critchlow: Well, there may be a reason you haven't heard about it.

Pat: Yeah.

Terence Critchlow: A lot of it's just your network, right? Going out, going to different events, talking to different people, finding out what they're doing, where they're going—that sort of stuff is really how I've found those networks.

There's a couple of podcasts that I listen to. [00:05:00] There's also just conferences, like I was at Limitless last week—

Pat: Oh, cool.

Terence Critchlow: —two weeks ago. And there's a lot of passive investors, but also a lot of GPs there doing their thing. And so, as you get into the world, it is actually a fairly small group of people who are doing this at a high level.

And so you start making connections. You start interacting with people and they introduce you to other people and other people, and soon you have a lot more deals than you have money.

Pat: Yeah. It's so funny you bring up the small world because it's a big industry, but a small world. I was talking to a GP recently and I was going to set a call with him that I'd had a relationship with him for a little while. I was like, "Hey, I'm not available at this time. Let me connect you with my partner." So I connected him with my partner. He's like, "Oh, I actually just talked to your partner like two days ago through a different company." And yeah, we're talking about this person who just got hired at this guy's company who I talked to when [00:06:00] I worked with him in a different scenario. It was such a weirdly interlocking thing because it's a small but big world. But that's cool. So in terms of what you are looking for moving forward, are you taking all of your diversification plays? Have you picked one or two that you're going to pursue moving forward, or are you still looking to spread it out?

Terence Critchlow: I'm fairly focused these days. I like the mobile home park and self storage industries. I know self storage is going through a rough time right now, but I do like the industries in general. I really like the cash flow from notes. Being retired now, having that regular cash flow stream is important to me.

And so that's one of the areas that I'm looking at. I'm not looking necessarily to diversify out much more. But I'm also one of those people who follows sponsors. So once I [00:07:00] find a really good sponsor, I look for their next deals and their next deals. And so I've got three sponsors that I've been investing with for quite some time and continue to invest with them as they open up new opportunities.

Pat: Sure. That's good. What about mobile home parks and self storage—what is the preference that leads to that?

Terence Critchlow: I think there's a few things there. They're still early in their maturity cycle, right? So for things like multifamily, there's a lot of very, very big operators who are dominating those industries. And a lot of just very big operators like MC Companies with Ken McElroy, right?

I mean, yeah, he's only got 10,000 doors, but he's got 10,000 plus. [00:08:00] I think he's said he's looking to place a billion dollars in 2025.

Pat: Goodness.

Terence Critchlow: Right. So at that level you've got people who have a lot more experience, but that means that the market is much less fragmented. There's less opportunities for deals that actually generate a lot of higher returns and solid cash flow.

Self storage and mobile home parks are much more fractured. There's still a lot of mom-and-pop organizations there. And so I don't invest with the mom-and-pops, but I invest with people who are buying from the mom-and-pops and putting some systems in place to get some economies of scale. And so there's still that ability to make that transition there.

Pat: Yeah. That makes total sense.

Pat: And so you mentioned that you really find an operator you like and you reinvest with them, which is awesome. What are, I guess, the signals of an operator that you like, and do you have any red flags immediately of those like, "Hey, not for me"?

Terence Critchlow: I think probably the biggest red flag is if you connect with me on LinkedIn or meet me at a conference and within 30 seconds you're pitching me your deal.

Pat: Yeah.

Terence Critchlow: I'm not going to invest with you ever, right? And unfortunately that seems to be a common thing these days.

But as far as what I look for, I [00:10:00] really do look for really two things. I look for an operator who's been around a while. I want somebody who's been through at least one market cycle. And so, up until recently, that's been going back to 2007, 2008. I want them to have felt the pain, learned the lessons on somebody else's dime, and then I can come in and reap the benefits of the lessons that they've learned.

The other thing that I'm looking for is some experience in the asset class, right? I know some operators who bop around from asset class to asset class, and I'm like, "Well, that's great. It's nice to have diversity, but I want to make sure you have the depth in the area to be able to properly manage the property if things don't go perfectly." And they never do.

Pat: Yeah. When you think about depth, both on the deal and the sponsor side, are you strictly looking for years and full cycles, or what type of questions are [00:11:00] you asking to really get an understanding of depth?

Terence Critchlow: So, it sounds like what you're asking is how do I actually vet a sponsor?

Pat: Yeah, yeah, yeah. Let's zoom out. That's the question. Yeah.

Terence Critchlow: Okay. For me, vetting the sponsor is actually a pretty time-consuming process.

Pat: That's a good thing.

Terence Critchlow: I first want to talk to them about their vision and their alignment and stuff. What has been their experience? What are they trying to accomplish? What are they looking for? How do they view the investments—both their clients from the investor perspective and their clients from the tenant perspective? Because everybody's got tenants.

And what are they trying to accomplish? What are their views? Where do they see themselves growing or not growing over the next few years? That sort of stuff. So I see if there's an alignment with my expectations and my goals, because there are some great [00:12:00] sponsors out there that I will never invest with because what they're trying to accomplish is different than what I'm trying to accomplish. And that's just the way it is, right? I mean, not everybody's goals are the same.

I tend to be cash flow, so I'll never invest in a development deal. And if they're trying to grow and become a top developer in the country, that's awesome. That could be great for somebody who's looking to grow their investments faster. But that's not aligned with me. So I look for that alignment first.

Something that I've learned the hard way is I want to understand where they fall in the decision-making process. I've actually invested with sponsors who actually have no control of the deals, right? They've placed all the control for the deal in the hands of an operator. And that's fine. If I knew that upfront, I probably [00:13:00] would've made a different investment decision. Because the person that I thought was calling the shots wasn't. So I really want to understand what their role is in making decisions when things go well, when things don't go well. Who actually is the ultimate decision-maker? Is it some committee? Is it this one person? Is it a different person that I'm talking to? That sort of stuff. Because I found that that's important.

Pat: With that scenario, was it a fund-to-fund situation or a placement agent? How did that happen?

Terence Critchlow: It wasn't a fund-to-funds because I would've picked up on that pretty quickly. It was actually a fund where the GP [00:14:00] invested in an operator. And the operator basically has complete control over all the decisions—not from an SEC perspective, but from a practical perspective.

The GP was just a fundraiser. They also did the investor relations and that sort of stuff, but they had zero operational control. And so when things weren't going according to plan, they were entirely dependent on the operator. They couldn't replace the operator, they couldn't make any changes. They couldn't do anything. I mean, they could provide guidance or suggestions, but they really had no authority to change how the deal was actually going and stuff. So that was a surprise to me. I was under the impression that they had the ability to—yes, they had an operator, but the operator was going to be replaced if they weren't performing. That turned out not to be the case. They actually could not make that switch.

Pat: Oh man. Was there any way you could have figured that out when you think about lessons learned? Or was that just a "I gotta hang up the cleats on [00:15:00] this one"?

Terence Critchlow: I think for me, it's just one of those things that I wasn't aware of that I needed to really talk to them about. And since that case I've been asking: "Okay, what happens if? Who are your alternative operators? If this goes bad, who do you replace them with? Do you have that authority? Do you have a committee that has that, or you and a couple of colleagues? Who actually has that authority to replace your operators and move the deal forward without them?"

If I'd asked that question in this case, the answer would've been, "Well, nobody, we're tied to this operator. They're running the deal," which would've been important information for me to have.

Pat: Yeah. That's tough. Thank you for sharing that. And this kind of segues into your business now—you read a lot of content in this space, very almost like an LP [00:16:00] coach, if you will. What are you based on the conversations you have with people—I know there's a book, a call—what are you seeing early mistakes early investors are making right now?

It could be a reflection of, "Hey, this is mistakes that I've made," and then that's translated. Then besides that, what are you hearing the most among investors that are coming into your ecosystem?

Terence Critchlow: I think that the thing that I hear most is that people really are taking GP pitches at face value. They're not spending the time to get educated on whether or not the deal is reasonable, whether or not the pitch is reasonable, whether or not the sponsor has the experience that they project.

And so that sort of thing is unfortunately common and to some extent promoted by GPs, right? It's like, "Here's my deal. Look at how great it is," versus [00:17:00] "We want you to take the time to go deep to understand everything, answer all your questions, and do that."

There aren't—GPs are under time pressure, right? They are. And so LPs aren't professional investors for the most part, at least at the retail investor level like I am. And the people I talk to and my friends and colleagues are just retail investors. This isn't what we do for a living for the most part. We have other things in our lives that suck up time. And so we think it's like the stock market—write a check and here you go.

Pat: Yeah. Yeah, it's so interesting. I had an LP reach out to me and he pretty much said, "I am going to lose 90% of my investment." And the way he phrased the email was, "I didn't know real estate could go down 90%. I thought it [00:18:00] always had value," and it was a clear indication that he didn't understand the capital stack. He didn't understand common equity. He didn't understand what that was.

And so it really begs the question of where does the ownership and accountability of the GP start and end? And where does the ownership and the accountability of the LP start and end? Right? You're not going to get on the phone with the GP and say, "Hey, I've been following you. I've gone through everything. Here's all my money." And the IR rep that's quota-bearing is not going to say, "Hold on, do you understand these 27 things before you...?" You know what I mean? So it's a tough thing to think about, but actually I had that email happen, and then I also had someone on the podcast that has an LP investing club, and one of his number one things of "Hey, this is what needs to die in passive investing" is that you don't need it to go to zero in order to lose all of your equity. So it's really interesting that you brought up that educational aspect.

Terence Critchlow: Yeah. To me, it is the LP's responsibility ultimately to be [00:19:00] informed about what they're doing. Unfortunately, it can be very hard to get that information. Beyond the financial education—what is the capital stack, that sort of stuff—trying to find out the sponsor's history and track record? The only people who talk about the sponsor's track record is the sponsor.

Pat: Yeah. Yeah.

Terence Critchlow: It could be really hard to find out what their actual track record is.

Pat: Yeah. And it's also—I like to bring up a contextualized track record, right? Like there's marketable track record, there's contextualized track record on the good and bad, right? Maybe this was a good sponsor that got into a bad deal and was subject to these black swan market conditions. Maybe it wasn't—maybe this person had a good track record because they just were in a rising tide situation.

So you talked about education, and again, you are providing educational material to LPs. [00:20:00] What is some advice that you would give LPs around becoming educated? What are your thoughts there?

Terence Critchlow: I think there are a few people out there who are providing educational content who are trying to do it without a backdoor profit motive, right? A lot of the educational content that's out there is provided by GPs that's basically, "How great my deal is. Here's all the reasons why my deal is great," provided as educational content that's very focused.

So if you look at enough of those, you can see the different perspectives and see what's the same and what's not. But yeah, I think a lot of it is just—there are a couple of good books, like The Hands-Off Investor is a really good book for thinking about what you need to know from the perspective of an LP. [00:21:00] And so I'd recommend that. There are some podcasts out there like yours that try to educate LP investors from the perspective of other LP investors. There's a few of us on LinkedIn that are providing LP-focused content. So there are mechanisms out there, but I honestly think the biggest thing is to sit down and think about what you are actually trying to accomplish. What is it that you are looking for? Are you looking for cash flow? Are you looking to build your wealth?

And then what do you think are the asset classes that really resonate with you? Do you love multifamily because of its mission to provide housing to people? Or do you hate it because you're worried about government interference in that space and rent controls coming in? Do you think self storage is a complete waste of [00:22:00] space and all the areas should be bulldozed and turned into affordable housing? Or do you love it from a perspective of having that great ability to raise rents on a regular basis and have tenants for long-term stuff?

What is your personal investment thesis, right? Come up with that idea. What do you need? What are you looking to get out of all of this? And then use that as an initial filter for the deals. It'll get you a lot farther than a lot of people are getting.

Pat: Sure. And besides—I understand you are a cashflow investor. You like mobile home and self storage. Are there any other parts to your investment thesis?

Terence Critchlow: Conservative cash flow, long-term investing. I'm not looking to turn things really quickly. I'm looking for long-term investments, so I tend to be [00:23:00] focused more on the five-to-ten-year deals than the three-to-five-year deals. It ties into the cash flow in a lot of ways because the longer you hold things generally the better the cash flow ends up being. But that is another perspective that I take because of what I'm looking for.

Pat: Yeah. That's great. And, Terence, we're coming towards the end of the call and I want to ask my favorite question. What part of passive investing do you think needs to die?

Terence Critchlow: I think there are a lot of them. The one that I'll bring up here is that so many people believe that if you're a passive investor in real estate, you can somehow bring your taxes down to $0. [00:24:00] That is possibly true if you are a real estate professional. Most passive investors will never make real estate professional status, and so a lot of the tax benefits that are talked about by the GPs and by the sponsors are irrelevant for most of the LPs.

That's not entirely always the case; there are oil and gas deals, there are short-term rental things you can do. But for the most part the tax benefits are you don't pay taxes on the income you get for a while and then you end up with recapture at the end. Not exactly the benefits that are promoted.

Pat: Yeah. I've been waiting for someone to bring this up—accelerated depreciation is not the whole story. Talk to a CPA, I'll say that much. All right, Terence. I would love to learn more about MBC, what you're [00:25:00] doing, your mission there. Is it a passion project? Is it something you're really trying to get out to the world? Tell us a little bit about that.

Terence Critchlow: So MBC is my company. It is really just a passion project at this point. What I'm trying to do is—I've been in the tech space for 25 years. I know a lot of high-net-worth individuals who are fully invested in the stock market. I want to give them an alternative to their 401(k)s and index funds that actually generates cash flow and help them build awareness about this.

I tend to think of myself as somebody who's fairly interested in investing and looked around for a long time, but until 2018, 2019, I wasn't even aware that syndications were a real thing, that you could invest in them. And so, yeah, I know the Tax Cuts and Jobs Act made it easier to advertise and all that stuff, but they were there; they existed beforehand and it was just much harder to find them. [00:26:00] Even now a lot of people aren't aware of them. And so I'm trying to bring some awareness about why you would want to invest in something other than the stock market, which is fully passive if you do an index fund type investing or a Boglehead. Why would you want to do something outside of that, and what are the benefits and what are the risks for that? And so, yeah, it's just a passion project for me.

Pat: Yeah, that's awesome. And Terence, if people want to learn more about it, learn more about you, get in contact with you, what's the best way to do it?

Terence Critchlow: Best way to contact me is through LinkedIn. I think I'm the only Terence Critchlow up there. I'm pretty easy to find on LinkedIn. And then if you want to sign up for my newsletter or book a call, you can go to mbc-rei.com, which is the website that I've got. It's got all my old newsletters on it and it's got a place to book a 30-minute call with me.

Pat: Awesome. Terence, thank [00:27:00] you so much for doing this. Thank you for the support you've shown me. Thank you for constantly having conversations with me and look forward to staying in contact. And everyone listening to this episode—

Terence Critchlow: All right. Thanks Pat. Really enjoyed it.

Pat: Sure thing.