In this conversation, Ron Moore shares his extensive background in investing, starting from his teenage years in finance to his current role in the hospitality industry. He discusses the importance of understanding risk in passive investing, particularly in real estate syndication, and emphasizes the need for due diligence and operator evaluation. Moore provides valuable insights for new investors, urging them to ask questions and educate themselves about the investment landscape. He also critiques the narrative comparing stocks and real estate syndication, advocating for clearer distinctions and better education on investment options.

Risk, Reward, and Reality in Passive Investing with Ron Moore

Pat Zingarella (00:01)

Awesome. Ron, thank you very much for joining. I know you and I have been communicating on LinkedIn a little bit. You've been an advocate publicly, so I really appreciate that. Why don't we just start by, you know, telling us a little bit about your background. I know you're in the hospitality business, but we'd love to learn a little bit more about what you do and we could jump into it.

Ron Moore (00:18)

Sounds great, thanks Pat. It's a pleasure to be here. So I got started in investing when I was a teenager. I'm in my mid-60s now, just turned 66 this past week. And so I've been doing this for a little bit of time. I started on the financial side, trading bonds. And then that led to trading futures and options and hedging portfolios. I even wrote a white paper at one point that I sent to the Chicago Board of Trade because I thought one of their indexes was priced wrong.

They didn't give me any credit, but a few months later after sending the paper, they changed the way the index was calculated. So, I don't take any credit for that, but it was really interesting is that I had been asked because I had submitted the paper—somebody had heard about it—I'd been asked to speak at a business conference. I was a nobody, worked at a boutique firm, no research background, no publications in the Wall Street Journal or anything like that.

Pat Zingarella (01:05)

They changed it. That's awesome.

Ron Moore (01:33)

And I gave my presentation right after lunch, so nobody was there, or very few were there; people were probably still sipping on their martinis or whatever. And so the keynote speaker was asked a couple hours later in the evening session whether they had been at my presentation and he said yes. And he was a high-powered research analyst, right? And he said, "Yeah, there's not much to it."

So the very next day, somebody came up to me that had been at the presentation and said, "Did you read the bond buyer index today?" And I go, "No, why?" He goes, "Because the Chicago Board of Trade just announced that they're changing the price of the index because it had been calculated incorrectly." So again, nobody knew who I was going in or after I came out, but it was kind of one of those feathers in your cap. So I spent about two decades trading bonds and futures and options. Then I

Pat Zingarella (02:30)

Listen, tell the story. Take the credit. That's your story. That's awesome.

Ron Moore (02:44)

got the midlife itch and went and taught religion for another two decades, and then my father-in-law passed away and so I started running the family business. We have three motels: two in Florence, Oregon, and one in Salina, Utah. So out in the middle of nowhere in all those locations, but that has given me kind of the start into real estate.

I'd never been much of a real estate investor prior to that time or paid much attention. We had a home that we couldn't sell once when we wanted to, so we rented it out for a little bit and that was the extent of my real estate investing. But I had read probably thousands upon thousands of red herrings or prospectuses in the bond industry and had sued some people because they weren't following the guidelines that they had put in that, and our firm had won. So it was one of those things—I had a great background, but really no experience until a couple of years ago.

At that time, 100% of my portfolio was in equities or cash. And I decided, well, it's time to look at maybe diversification a little bit as I get into retirement age. And so the idea was to put some passive income in my portfolio, something that I didn't have to manage. I thought about going out and buying my own properties and managing them because that's what I do every single day in the hotel business. I mean, they're the shortest of short-term rentals, as I like to say. You got rooms that need to be sold every night. You got people that got to clean them and stuff like that. And so anyway, that's kind of a little bit about me. So why don't you take it from here and let me know what you need to know.

Pat Zingarella (04:34)

Yeah, sure. No, your story is pretty interesting. One of the things I love about engaging with you on social media is you're pretty outspoken about risk versus reward in the passive investing space, right? I feel like LinkedIn sometimes can turn into this grovel-fest of everyone kissing each other's hands, but you're like a realist on there. What's interesting is your background of risk assessment—you were a full-time trader, and then you're challenging the potential narrative of risk in the passive investment world. How do you think about risk today and what people are actually saying?

Ron Moore (05:30)

Well, here's the thing. When my father-in-law passed away and I took over the business, I went to my mother-in-law and I said, "Hey, look, we can sell everything. I can go invest it and give you the same type of income that you're getting now. I'll be in a world that I know and I won't take on market risk. I won't take on interest rate risk. I won't take on any of that other stuff that people sometimes forget about."

As I've learned more about real estate syndication, I see that piece missing a lot. Leverage is really, really good when it works well, and it's terrible when it doesn't work well. I mean, because a 20% downturn wipes you out—probably less than that because of expenses and things like that. But if you're leveraged at 80% loan-to-value, a 20% downturn and your investment's gone. The bank is paid before you do.

And the other thing is that there's a big time-risk in real estate syndication. And that's what I'm going to refer to when we talk about passive investing here, because I have a lot of dividend stocks. That's really passive. As a matter of fact, a lot more passive than real estate investing—maybe just because I know it better.

There's time-risk, market-risk, interest rate-risk, and liquidity-risk. One of the things that I see is people sometimes talk about return in the decimal place: "Yeah, you're going to get a 15.5% return." And I'm going, "How the hell do you know what's going to happen in the next five years?" It's just so unpredictable and I don't think all of that's priced in. I think returns are probably a little bit low for the amount of risk that you're actually taking on. And there'll be people out there that have been doing this and not agree with me one iota.

But until the occupancy drops 10% or until the cap rate goes from a 4.5 entry to a 6.5 exit... so I did some calculations because I refinanced the hotels in 2019, and I think it was in the low fours. I'm going, "Okay, I've got a 10-year balloon on this thing, so I've still got a few years." But I started calculating, "Okay, what interest rate is my pain point to go into?" And right now, I'm fine because I've paid down enough principal. But some of these things are just not calculated correctly in terms of, "Okay, here's your return and this is so much better than anything else you can do." I'm not afraid to call out BS when I see it.

Pat Zingarella (08:58)

Yeah, I love it. You've got people shouting from the rooftops comparing it to the public markets. And then I've got LPs in my inbox saying, "Hey, I'm done with this. I just got wiped out when I was told this was the best buying time in history." One of the things that you had said to me once, Ron, was you talked about writing reviews, but you said, "I want to wait a couple of months because I want to make the determination if it's a bad operator or if it's market conditions." How do you tell the difference?

Ron Moore (09:37)

Okay, so I didn't get into the markets when I wanted to. I started looking at syndication probably late 2020 after COVID. I had some money set aside from the sale of a house, and I didn't want to go back into anything but real estate.

I started looking at options and the Fed started to raise interest rates. I can remember talking to a couple of people really early on. Rates were at a quarter percent, a half percent, three quarters of a percent. They go, "Okay, we're about done" when they got to about 1.5%. I said, "No, I think this thing could go as high as 5.5%." Well, I pretty much nailed it right on.

When we got there and it stabilized, I went, "Okay, now I feel fairly comfortable. We're at a more normalized Fed funds rate." I didn't see as much risk there, but inflation still was pretty high. We were noticing in the hotel business that the cost of getting any work done and supply chains still weren't back online completely. So I waited until 2023 when I felt we had reached the point that the Fed could hold. I thought they were going actually hold a lot longer than they did.

I know that their two main focuses are inflation and jobs. They've come back in and started to lower because of jobs mainly, because I don't think inflation is completely under control, at least not to the extent that they believe it is. And I'm going, "Okay, lower," but I don't think the job situation is like it has been in the past. I think a lot of the jobs being lost are due to AI and not because businesses are doing terrible.

Anyway, they started lowering interest rates and everybody said, "Well, as soon as the Fed starts to cut rates, we're going to start recovering." And we haven't. As a matter of fact, prices continue to drop, or people claim they're buying better deals and stuff like that. And the yield curve widened out a little bit. Now we're talking my turf—yield curves and stuff like that. It widened out, keeping mortgage rates pretty flat. They just started to come down again.

I look at that and I go, "Okay, I've taken a chance." An operator really shouldn't be held responsible for that; it's not their fault that the market acts the way that it does. So I bear the risk of market calls and changes in interest rate environments. All that is part of the investment world. If an operator can still bring a really good deal and it doesn't make a whole lot of money, that's not necessarily their fault. To ding an operator because they did a really good job and the market just went against them... being a trader, I was never a bad trader because I lost money on a trade. Sometimes things just didn't work out.

I want to be really cautious in how I evaluate people because I had a five-year investment—is what I told myself—and my longest one is only two and a half years into it. It's only halfway. There's still a possibility that it may do everything that the operator said it would do by the time we get to the end; it just won't be as smooth of a path as I thought it was going to be. Does that make sense?

Pat Zingarella (13:59)

Sure. Totally. I always tell people there's accountability on both sides. It's important what I call "contextualized track record." Is it the market? Is it the operator? You've really got to understand how to do that due diligence. I imagine you have examples.

Ron Moore (14:43)

So you want to know the bad operator? You said, "Why am I a little bit reticent of just evaluating right out of the gate just because it's not performing well?" There are still people that I think are good operators, where the deal just hasn't gone as smoothly as they want and I'll be a little bit patient.

But then there are people that I have experienced in a couple of my deals. I had one deal that I'm in and it's basically comatose. The ink hasn't dried on the death certificate yet, but in my mind, I've completely written it off as a capital loss. There were some things on that deal that I thought should have been done better.

First of all, you're shown a pitch deck and it says, "Hey, we're going to raise this much capital and this much equity." Well, they had one of their investors back out. Instead of coming back to the rest of the investors and saying, "Hey, look, we're undercapitalized. What do you want to do?" they just moved forward. And so the deal started underwater. It started in a bad position and had I been given the option, I probably would have backed out because what you said was going to happen and where you're at didn't line up.

On that same deal, I expect a certain level of diligence. When an operator says they'll take care of the due diligence, I expect them to double-check and make sure the rent rolls are correct. Make sure occupancy is exactly where they say it is. Make sure they've inspected the building and outlined all the repairs prior to closing.

When occupancy is 10% lower than what you thought going in, or when there's $100,000 or more in repairs that weren't identified until after you closed, I put that on the operator. That's the passive approach I'm expecting. I mean, I look at deals all the time for our own personal real estate. I have turned down deals because I take somebody out to the property and they say, "Okay, here's all the repairs that are going to be needed," and I go, "Probably not for me." I'm not afraid; I've taken two projects down to the studs and redone them. But if the work is going to be more extensive and there's not a price break to compensate for that... I'm looking at a deal right now that's a laundromat and the equipment's 16 years old and held together by duct tape and baling wire, right? The reviews are terrible and I'm going, "Okay, I'll have to take that into consideration." I know long before I ever close what's at risk. If an operator doesn't know that—and it's reasonable that they should—they should be held responsible.

Pat Zingarella (19:04)

Sure. And when did you find all of this out? Like, when did you find out they were undercapitalized going in?

Ron Moore (19:16)

It was maybe the second distribution, or maybe I might have missed it. I got a distribution and then I was told after the distribution, "By the way..." and I'm going, "Well, wait, how come my distribution is higher?" I probably didn't realize it until the K-1s came. I go, "How come my percentage on this deal is much higher than I anticipated?"

Yeah, well, they sent something out that said they decided to go forward even though they weren't fully capitalized. Let's just say maybe I should have known about it earlier, but I didn't know about it until six to nine months later.

Pat Zingarella (20:06)

Sure. That's rough. Do you think there is anything you could have done to avoid that, or was this just "what happened happened"? Is there advice you would give someone in your position looking at this for the first time?

Ron Moore (20:38)

I wish I knew then what I know now about the industry, because I would have asked a lot more questions. I'm not the type of guy that says, "What do you need? Let me send my check." I read the PPM on all my deals.

Pat Zingarella (20:53)

Yeah, I imagine you're a force to be on the other side of the phone call, especially with your background talking about yield curves. I don't think a lot of LPs doing this for the first time would bring that up on a call with IR.

Ron Moore (21:12)

So I have enough investment experience that I'm kind of outside the box compared to the normal first-timer. I would say: ask questions. If you don't know how something works, ask a question. Don't sit on a pitch call or send your money if you're still not sure how everything works.

I guess I was a little bit naive because when I was in the bond business on the trading floor, I transacted business by phone without ever meeting people. Your reputation gets around really quickly if you screw people. But you also had some laws in place that made it more difficult for people to treat people poorly. You had mediation and arbitration that you could go through if something bad happened. In 20 years of trading, I think I might have had one trade where there was a disagreement and we had to split the difference because we didn't agree on something. This was even before calls were recorded. I was just used to people being knowledgeable and honest. But I was also dealing with a bunch of people that passed the Series 7 like I did. They knew what their responsibilities were. With unregistered securities, you don't get that same type of atmosphere.

Make sure that you know how the waterfall and the payout structures are going to work. I used to think that commodities like gold or even buying real estate had a pretty high transaction cost until I saw the fees that are charged in a syndicate: acquisition fees, disposal fees, property management fees, and asset management fees. I go, "Man, okay, I should know how all this stuff works."

Pat Zingarella (24:20)

Yeah. Well, since you brought it up, I'll ask you: what part of passive investing do you think needs to die?

Ron Moore (24:39)

Well, in large part, I wish the attitude of "stocks versus real estate syndication" would go away. I can show people how to make cash flow on stocks or using options that exceeds the 18% to 20% that they're going to get in a real estate deal; it just doesn't have necessarily the tax advantages.

The other thing that I think should go away is putting values that come from owning real estate on your own into real estate that's transacted through a syndicate. Real estate syndication is really not owning real estate; it's a five-year business deal. Either the business succeeds or it doesn't—you're against the clock. I wish that distinction would be made clear. Let's not talk about real estate in general. If we're talking about a syndicate, let's name the pros and cons of being in a syndicate and not the pros and cons of owning a single-family home that you're going to manage.

The other thing I wish would go away is: let's stop saying multifamily is better than single-family rentals. I know some people that have done really, really well in single-family rentals—a lot better than what I've been able to do in my multifamily portfolio so far. My mom is a case in point. She's owned single-family rentals for 45-plus years. She couldn't tell you the difference between an entry cap and an IRR, and yet the income she has derived has been sufficient for her to travel all over the world and enjoy her life. Let's educate people. What are the options? What's going to suit your needs best? There is no one-size-fits-all here. You can do it through options, syndications, or single families.

The other thing is the tax advantage. "Hey, look, I reduced my W-2 taxes." I have about 45 years of tax loss carryforwards. Unless some of my real estate sells and I have to reinvest, I'll probably die before I can get through all the write-offs because I'm not a "Real Estate Professional" in the eyes of the IRS. I get a maximum of $3,000 a year in that write-off. Let's not assume everybody's in the same position. Everybody selling you a piece of a syndicate is a real estate professional. They are going to get their money back a lot sooner than you because they get it back through tax savings. That's fine, but I just wish that was made clear. The average syndicate LP is not a real estate professional. Let's just make sure that we're clear about what we advertise.

Pat Zingarella (30:50)

Yeah, I wildly agree with that, especially on the stock market versus real estate narrative. It's a comparison you see often in marketing material, but it doesn't always reflect the personal position of the individual. I hear from LPs all the time that got smoked in a syndication and they'll only stick with active investing or the stock market moving forward.

A lot of the things that people wish they knew... unfortunately, a lot of people don't understand where they lie in the capital stack. Someone had reached out to me and told me they were going to take a $100,000 loss because it wiped out the common equity. The individual said, "I thought real estate always had some value." I was like, "You're not owning a single-family property. You are in the part of the stack that loses first when it drops." That is what people wish they knew. It's a lot more education and a lot less influence.

Ron, honestly, great answers. I really enjoyed this conversation. I knew I would. We're at time, and I typically ask people where they can find you, but I would recommend all the listeners to connect with you on LinkedIn because I love seeing your comments all over the place.

Ron Moore (32:37)

Yeah, LinkedIn would be best. I can't even tell you what my handle is, so.

Pat Zingarella (32:44)

Search for Ron Moore. You'll find him commenting everywhere. Rod, thank you so much. Thanks for your support and for connecting with me. This was great.

Ron Moore (32:49)

Thanks Pat, it's been a pleasure. Have a good one.

Pat Zingarella (33:00)

Signing off.