Ben Miller - Forging Technology into Real Estate Investing (Part 2) (#20)

“First ask ‘What is the conflict of interest?’,” Ben Miller

Ben Miller Bio

See Episode #19

Show Notes (cont.)

• Ben Miller talks about lens for risk (2:30)
  • Think about scenarios that “could go wrong” (2:45)
  • World class downsider
  • What if the developer goes bankrupt?
  • Planned for downturn
  • In 2017 he thought it was too frothy
  • Seth Klarman thinking (3:45)
  • Inversion thinking- What’s the worst that could happen? (4:10)
  • Dynamics in private market are different than the public markets (5:00)
• Process of investment (5:50)
  • Invest as a secondary or preferred lending investment- 55%-80% (6:30)
  • Preferable to invest in equity on a wholly owned basis (7:30)
  • Not interested now in JVs as alignment is not in focus (7:50)
  • Aim to have a direct relationship with developer/owner (8:30)
  • Fundrise only a 1% fee
  • JV structure of 90/10
  • Real estate deal is much more efficient now due to marketing to perfection (10:00)
  • Vertical integration efficiency is the optimum (11:45)
  • The most vertically integrated companies are most “antifragile” (13:00)
  • Benevolent Dictatorship (15:00)

Real Estate Market Perspectives

• Avoid cyclicality of specialization (16:00)
• Staying in one product type is a flaw (17:10)
• More multifamily developers (18:00)
• Have to be “on trend” and look at the future to invest (18:50)
• Difficult for developers to be agile among product types (20:30)
• Not normal in real estate to be flexible (21:15)
• Core Office and luxury apartments are the next “suburban office” and will decline in value (21:40)
• Multifamily is mostly neutral in performance (22:40)
  • Core customer doesn’t  want to be in small units except due to cost  (23:00)
  • Shift away from small spaces will cause it to suffer (23:45)
• What does customer want? (25:10)
  • Move south (25:20)
  • Not in major cities
  • Spreading to whole different regions (25:50)
  • What happens when technology devalues location? (27:00)
• It’s easy to see what deteriorates but not easy to see where it appreciates (27:35)
• Adopt the work from home model (28:10)
• Iterate first hand opportunities to work from home to test it out (28:30)
• Ride the trend and figure it out
• Customer wants to be successful without doing harm (29:45)
  • Wouldn’t sacrifice return to benefit society
• Last mile industrial (31:25)
• Last mile data- 5G will be everywhere in 24-36 months (31:40)
• Infrastructure (32:40)
  • Real Estate slips into the background (32:50)
• Most real estate has been built for Excel Spreadsheets (33:10)

Fundrise Team and Platform

• Iterate on team (34:10)
  • Smart people
  • Low Ego
  • Attitude to “dig the ditch” (34:50)
  • Knowledge less important
  • Desire to learn-
  • Intelligence is “smarts minus ego” (35:30)
  • Discount your desire (36:15)
• Recruiting and hiring is a privilege (36:30)
  • Learn and listen to find out internal motivation (37:00)
  • Look for candor (37:30)
• Platform success-
  • Luck and chance (38:10)
  • Getting on the right trend (38:40)
  • Software engineers make company think differently from other real estate investment (39:40)
  • Stress Test Analysis of Portfolio– 3/31/20 (40:00)
    • Looked at portfolio granularly and tested it with downside scenarios (41:55)
    • Share with customer test of worst case scenarios
    • .2% of portfolio loss if pandemic lasts 12 months (42:30)
    • Most businesses don’t want to be as transparent (43:00)
    • Create trust through transparency
  • Project went bad and the lawsuit was settled and result was published to entire customer base (43:40)
• Statistics of customer base (44:50)
  • 135,000 investors
  • Late 30s to early 40s average with range of 20 to 90s in age.
  • Modern investor- mobile investors (45:30)
  • $1.1B in investments under management (45:30)
  • $4B in real estate
  • Average of $10,000 of investment
  • Funds have 50,000 investors each (46:00)
  • Looking for “outcomes” (47:00)
  • Basket of investments (47:30)
    • Investment advisory product (48:15)
    • Broad diversification (48:30)
  • 3 Outcomes with varying baskets of investments depending on market conditions (48:50)
  • Advised product for the end customer (49:30)
  • Technology to manage millions of transactions (50:00)
    • 1M 1099s
    • 100,000 K-1s
    • How we connect with people
    • Team that addresses questions from 1M users (51:00)

Life Priorities

• Silver lining from pandemic is that Ben Miller is not as much of an workaholic (52:15)
• Work from home is actually better than working in the office (52:45)
• If done right, it is better than the old model (53:10)
• Having a rich family life while trying to make the world a better place
• Work all of the time
• Focus on customer to the point of “giving” back the service to them (54:10)
• Build a product to be value driven (55:20)
• Wins, Losses, Surprises
  • Win- Team that has evolved together (56:15)
  • Loss- Figure out how to do business with family issues (56:40)
  • Surprise- The way the business played out- success came from different ways than expected…comes from “flow” (57:20)
• Advice- “Know what you want.”  Decide how to do it. (59:10)
• Billboard Answer: “First ask “what is the conflict of interest?”(59:30)
• Leaders are not rising above their “conflict of interest” (1:00:35)
• Let other people be right. (1:00:55)

Postscript (Tom Amos)

• Vertical Integration (1:03:00)
  • Aim to scale his investment strategy to make it more efficient and less costly for the investor
  • Developer perspective of vertical integration
  • Touch points of properties
• City living vs. suburban living (1:08:00)
  • Office and retail most affected
  • Multifamily less affected
  • Technology devaluing location
  • Social aspect- The New Geography of Jobs- Young talented people want to be near other young talented people
  • Countercyclical events
  • Do people need to be together physically to do business?
  • Less “chance” meetings, more intentional meetings
• Disruptive aspect of Fundrise (1:15:00)
  • Evolution of real estate investments into a consumer marketplace
  • Different than other private equity firms with cost and approach