Marcus Ridgway on Building an Institution-Ready Real Estate Platform

0:01 >> We're going to invite up Marcus Ridgeway to the stage from F6 Partners. We're going to do a fireside chat. While he walks up, I'll read his bio real quick. Marcus is a real estate entrepreneur and investor. He founded F6 Partners in 2020, which manages over $600 million in equity across multiple real estate sectors. He's the co-founder and former CEO of Treehouse Communities, uh Ritz Management, a top five owner-operator of manufactured home communities in the US. Ridgeway also co-founded and served as COO of Invitation Homes, which went went public on the New York Stock Exchange, which was backed by Blackstone, where he helped build the nation's first and largest institutional single-family rental company with over 80,000 homes. He's an active early-stage investor in real estate tech startups. Let's welcome Marcus to the stage.

0:54 Great. So, there's not too many people that have been backed with $4 billion from Blackstone and took a company public. And you know, I just wanted to kind of pick your brain on that a little bit, that process, what everyone here in the room could learn from that, what you've learned from it. And but to start with, what did I leave out from your bio or something that's important about F6? Um >> >> well, I think at our core, we're very, very conservative people. Um we're just structurally conservative, and so I really liked your framework of how you uh talked about deal flow and and structure. I think as investors or people who are looking to invest, um having a framework to build from is really, really critical to any success. Any good investor is a student. And they're constantly learning, and there's some type of feedback loop. And so, building a structure and a framework from which you invest, make mistakes, learn, reduce latency, those are all really critical things. And I I I thought you This is my first meeting here, and I was really, really impressed with a couple of those slides. I thought they were spot-on. Awesome. So, many times though, people look at someone like yourself and they think, "Okay, well, maybe he's conservative now after having accomplished so much and taken a company public, but they might think to themselves, 'For me to create a lot of

2:11 wealth, I need to take a big risk. I need to like take my shot.'" How did you do that and navigate that? And and was it a risky thing that you were you were doing to start with? Well, I I think first, you know, when you when you think about taking $4 billion from a large institution, you have to be structurally prepared to do that. You have to absorb that. And so, it's not just like one day $4 billion comes, but it, you know, billion comes over time. Um but, you have to be structurally ready. And so, to your point, I think you have to have a framework. Again, I've talked about frameworks a lot. But, big institutions don't look at pitch decks. They don't look at deals. They don't even look at IRR. They look at downside risk. How are you going to protect their money from going away?

3:02 And at the end of the day, that is the most the number one critical thing. So, our driving thesis is always around risk mitigation, the asymmetric risk of, you know, your your downside is unlimited. You could lose all your capital, and your upside is capped. And too many people think about it as like, "Oh, it's a it's a home run." And that's called gambling if you're not if you're not mitigating risk. So, I think that's really important when you think about institutional capital or any capital coming into a system of how you how you're going to mitigate all that potential loss of capital. So, Schwarzman famously decided like, "Oh, when I raise my first fund, I'll raise a billion dollars." And for a long time made no progress, and then got some Japanese oligarchs in. In your case, did you do something similar where you like you built the structure and framework, and you just knew you were going to get backed by a big institution? Or how did you get into that position?

3:54 I mean, when we first started, we we we just knew we needed to create a company that was institutional-looking. I think one of the one of the challenges is um as an entrepreneur is the hustle creates, you know, some type of result. And what's really important is you need to build an architecture that creates results and creates money. And so, we often think of work as work equals money, whereas it's really architecture that equals returns and income. And so, from a very early stage, we decided that we were going to use institutional software. I mean, we're talking 2008 when we started buying single-family homes, you know, the the world was going on sale. Everybody was using AppFolio or some basic software, and we made the decision to go out and use Yardi. Yardi had no tool for single-family rentals.

4:48 It was a multi-family software wrapped around a really good accounting package. And so, it was very expensive for us. We had to hire some technology people to build that out for us. And then, you know, so everything we did was structurally trying to think about what does this company look like whether it big capital comes or not. And then, we also did something that I think most people don't do, which is really important, is we created an investment committee, even on a single house. There's so much moral hazard if you're just like buying, buying, buying. And so, we created an operator, a sponsor, and then the institution that's investing. And so, that could look like friends, that could look like you know, third-party people that you bring into an investment committee.

5:37 But, it's really, really important that you start thinking about kind of these controls, building a framework, a system, a business that can kind of grow and scale. Got it. How did you once you had that framework in place? How did you get the attention of institutional players, centimillionaires, and billionaires? Yeah, I mean, you know this really, really well, just from what you've built in the community. It's it's less about getting, it's more about earning. It's a lot of freaking work, right? And so, I think sometimes we just think it's going to come one day. And so, you know, you have to change who you are. I mean, you have to realize you're not the smartest guy in the room. That's one of the things that I had to learn. Um I had to surround myself with really smart people. It became about um risk calibra- risk calibration, controls, putting fences around things, talent, developing talent, creating culture. Um but again, to your slide, you need something that's niche or on the edge. You need a a platform that is uh transparent. It communicates well. It is um trusting. I mean, early on when we were uh I'm not a spreadsheet guy, but one of our partners was a spreadsheet wizard, and he he was in charge of updating the

6:55 spreadsheet. And he put the wrong date one day, just the wrong date. And the wrath of institutional capital came down on us because if they couldn't trust the date to be accurate, then how could they trust us with anything else that came out of our company? And so, it was a simple lesson like that that really taught me that exactness is critical in this process. Like, anything that comes out, I'm paranoid at from from where I sit now in our firm, that it has to be accurate. And you can ask any of our employees, I always ask like if, you know, are you willing to stake your job on this? We we don't work out of fear. I'm not going to fire someone, but I need them to understand that, you know, this this front-facing part to investors is so, so critical. So, you know, niche, having an edge, having a platform, and then repeatability. Like, how can you repeat this over and over and over? I mean, at our peak at Invitation Homes, we were buying $200 million a week in one-off single-family houses.

7:58 It can go off the rails really, really quickly. And so, you have to make sure that you can repeat the process, repeat the institutional approach, and uh disseminate information in a in a really effective way. So, when it comes to actually building the relationship like with Blackstone or getting introductions to people at that level, um how did you like you may have earned earned it by putting the framework and architecture in place, like earned it by paying attention to details, but then like physically, did they just find you or like a friend connected you or Yeah, I mean, that was kind of a long story. Um I was on a call um with Ivy Zelman, who's uh um industry expert in doing research. And she was asking a bunch of questions to property managers, and I started asking some questions that were a little different than just a property manager.

8:51 And she called me back, asked what we did, told her we own 1,500 homes, and she said, "Do you manage them, too?" And I said, "Yeah, we're fully vertically integrated." And to your slide, >> >> and and she said, "Wow, we don't know any group that is owns 1,500 homes that also manages them." Um and so, there were people who had lots of real estate who used managers. There were managers who had managed lots of real estate, but no one did it fully vertically integrated. And so, she started introducing us to capital. Um and then, it really happened overnight. I mean, a lot of people don't know this story, but Blackstone came in, saw the systems and framework and architecture that we had built, the software we were on cuz we knew that the secondary market would be able to be have trust in in that accounting and software.

9:45 And they they literally said, "Don't talk to anyone else." We were trying to raise a hundred million. They said, "I want you to go back and uh underwrite this for a billion dollars." It's a lot of zeros. And we did that and on a Wednesday they shook my hand, said we'll do the deal, and on Monday they wired 35 million dollars to my my account. No docs were signed. Think about that. By the time we had signed our JV docs, guess how much money they had given me? A billion dollars. Yeah. They were great partners. They trusted us, we trusted them, and you know, kind of the rest is history. And And when we went public, I rolled out.

10:33 And they came back to me about 6 months later and asked if I could get the band back together and do it in manufactured housing. Because they had trust, they had experience with us, and they knew that we could go out and kind of just do it again. Awesome. So, a lot of centimillionaires and and billionaires we interview talk about mindset or mental models. Do you think there's anything unique about you that allowed you to succeed and do what you did? Is there anything that comes to mind that you do differently than a lot of people that you meet? Yeah, I mean, I would say um First of all, I really like people. I mean, it I might sound like a negative Nelly, but I'm I'm really paranoid about the downside. Very, very risk-averse. I'm a I'm a structurally just extremely conservative person.

11:21 I live in the same house I bought when I was first married. It's a three-bedroom, two-bath house. Looks like every other house in the neighborhood. Um you know, I grew up in a home where we didn't have a lot of money, and I remember my parents fighting. And it's kind of traumatic. Um and so stewardship of capital is key. I steward capital of families and friends. I represent people who invest with us that steward capital for pensions and retirees. And so, I'm always worried about sitting at the dinner table and having an awkward conversation. When I was first married, my wife had more money than I did. I had owned some ice cream stores, and the economy was tough, and I had sold them, and I was trying to figure out what to do.

12:08 And I was day trading a little bit. I had no reason day trading, none at all. But I was following some momentum swings, and I thought, "Oh, I'm good at this." One day it went against me. I went in the bathroom, I dry heaved, and the thought of losing my wife's money was crushing. And so this these kind of like stages in my life, I realized that there's a difference between volatility in the market and fragility. You have to structure your business or invest with people that understand that difference. When you think about dropping a rock in a lake, there's linear movement and and displacement. It's very minimal. You drop a boulder, it's very, very non-linear. There's like And And you have to build a system that will not allow for fragility to happen. And so I think at our core, we're always trying to understand what happens when this breaks.

13:10 What levers have to be true? Is this a binary decision? If it's a binary decision for an outcome that has to be true to reach our goal, then it's the wrong investment. So, just thinking about again, framework and risk, um again, I my CIO's here, I walk into a meeting, and I'll ask an analyst like what has to be true, and what are you afraid that might break, and if it breaks, are you willing to stake your job on it? Awesome. >> know if that answered your question. Yeah, I know, it does. So, basically like I mean, how you created a lot of your wealth was designing and architecting a system that was conservative enough that Blackstone trusted you to scale that up to a billion dollars instead of a hundred million. So, ironically, taking less risk is why you were able to grow it so much.

13:56 >> Yeah, and a lot of transparency and good communication. I think that's really important. Um The hard conversations need to be had immediately. You can't push them off, as painful as they can be. Got it. Um so, what are one or two things you're looking to source this year in terms of deal flow? If somebody's sitting on, you know, buildings in the middle of a city, um etc. Yeah, I mean, we're we're we're very focused on student housing right now. We we like that space. I would say it's not purpose-built student housing. Don't bring me um something that's uh 30 stories glass with tanning beds. Um we want to be in major markets, markets that have CAGR enrollment CAGRs that are positive for us in over the next 5 or 10 years. There's a lot of misconceptions around students going to universities, but if you're at a big public, your football team is on TV or in the national championship, we want to be around there. We love student housing, off-block, mid-rise.

14:57 Um it's where juniors and seniors and upperclassmen want to live with their friends. We really like student housing. Uh and we're really into senior housing. Um assisted living student senior housing, a lot of people made the wrong bet on timing uh in the late, you know, before COVID, I'd say. Uh all the regression models pointed that 70-year-olds would be moving into senior housing. Those 70-year-olds are now 80-year-olds, and they are moving in. COVID wiped out, debt reset. So, um there's some good opportunity there. So, those are kind of the things that we're focused on as a firm. Got it. Um what's the number one most powerful insight on what separates centimillionaires and institutional-quality heavy hitters from founders that haven't scaled their platform?

15:47 Yeah, I I I would say I mean, I was an entrepreneur. I loved to hustle. I loved the the kind of the direct result from my work. I loved being the guy in the room. I think number one is you have to start offshoring decisions. The The system, the business, the the the deal, whatever it is, can't be solely dependent upon you as the operator. Most businesses fail from going from 50 or 100 million to a billion because it's so dependent upon the guy or gal running the business. And so, you have to learn to make decisions that will rely on the architecture of the business and the people of the business to to drive return and results.

16:36 I would say separating your ego, I think that was a learning lesson for me. You know, I I I I anchored my identity as an entrepreneur, as this hustler, as this guy, and then I realized like that was so critical like results were so critical in that equation. And like you said, you have to be patient. You just can't do a deal to do a deal. Um our firm returned 200 million dollars to an investor because rates moved on us and inflation was increasing. We had a triple net strategy, and it just wasn't going to work. If I had put my identity to that, then I would have been crushed, and it was just the right thing to do. It sucked, but it was the right thing to do, right? And so, you know, you can't And the other thing I would say is when you when I don't want to be too contrarian here, but you know, you hear a lot the buck stops with me. And the And the buck does, but if you're set up to where the buck stops with you, then you've kind of got some misalignment within your firm.

17:30 And I would say the last thing is I believe people who are like billionaires and centimillionaires think long-term. They're not getting wound around the axle today, and they're really thinking what's happening over the next 10 or 15 or 20 years, and not just today. Not chasing the deal today, but really looking at the structure of the economy or trends. You can't guess what's going to happen, but you can be prepared for what might come. Um and so, thinking in in that framework. Awesome. Yeah, the last 19 years I've seen that really consistently, that family offices will do strategic things that make no sense short-term, but give them like a huge strategic edge long-term. And most other people aren't willing to play that game. And they don't care, right? Like if you think about all the billionaires that are in the news, they don't give a rip.

18:20 They just don't care. Like they're going to do what they think is the right thing to do. And like them or hate them, that's kind of just how they think. I'm not saying it's right, but I'm saying in there is a granular of truth that like I'm thinking long-term, and I'm not going to worry about what's happening. They don't like noise. I hate noise. If you're an employee of mine and you're writing 10-page emails or or post, like I go nuts. You have to think more strategically and less tactical if you want to make it to the next step. And understanding when you walk into a meeting, is this a tactical meeting, or is this a strategic meeting? You've got to figure that out really quickly in life, or you're going to get sucked into things that just are going to like I call them time sucks. How do you separate B-level employees they need to let go from clear A-level employees? Do you have any hard rules on that?

19:11 That We we talk about this all the time, and I'm probably got a little bit of a soft spot in my heart for employees. Kind of, you know, the devil you know is better than the devil you don't. Um but we we have weekly partner meetings, and we always are talking about A/B employees. Are they an A employee in a B role? Are they a B employee? Are they going to ever be advanced to an A employee? And so, having the right mentoring, the right, you know, program to help calibrate and move them along is important. But at some point, you know, you just you you you've got to give some I I like the world, and you've heard this. I like the world where are you on the right seat of the bus? And if you're not on the right seat on the bus, how can I get you the right seat? And if you can't find the right seat, then how can we find a nice slow way to get you off the bus? I don't want to kick anyone off the bus when it's moving.

20:08 Don't make me do it. That's all I ask. Got it. What about time management? How do you move quickly or be effective? Um how do you manage your time? Yeah, I I think number one for me, I I I guard my deep thinking moments fiercely. Um I wake and I'm not trying to get spiritual here, but I wake up and say a prayer every morning. I ponder and think about that. I go for a run, no headphones, no music, no podcast, no books, no nothing. I like to run. I like to think or not think. It's a reset moment for me. I come into the office. I have my moments where I I read my scriptures and and I think some more, and then I'll shut my door throughout the day, but having these moments where you can reset or have deep thinking moments is super critical cuz it charges my brain to allow me for kind of cutting through the noise. I said it earlier, I think number two is understanding the difference between um strategy and tactics. You can get you can you can waste so much time trying to like have these mental calisthenics around what's going on. And so you know, my dad taught me the third

21:26 thing is my dad taught me years ago in a brutal way, don't let your problems be my problems. And I'll tell employees and people that all the time. I'm not trying to be rude, I'm not trying to be mean. But your problems can't be my problems. And so when you're having those strategic or tactical discussions literally asking someone what can I do? Like what are you asking me to do? Like what's the blocker you want me to solve? Because that's where I'm at in life. I'm not here to kind of hear all the reasons why and what and if and all this stuff. I just you know, tell me what you need and let's move on. Got it. You said you're conservative, you like to manage risk. So what are like a deal structuring or due diligence strategy or two that is kind of a go-to for you at this point? Yeah, I would say high level >> >> is control.

22:16 Do not think control as authoritative. But I get to make the decision. That's not the control I'm talking about. I'm talking about control that gives you optionality. Um optionality is an insurance policy against volatility. At the end of the day, you need optionality and we've all seen it. If you're highly leveraged, you have thin equity margins, it doesn't take much to lose 30 40% of your equity position, move your DSRs out of compliance, and now you're like 80 90% leveraged like that. So optionality around all aspects of your underwriting and of your business. I think that is probably the number one thing that I think about. So control and how do I control? There's there's controllable risks and there's uncontrollable risks that are endured through time. And so just understanding that I think's really really important.

23:09 Option I I I like I like that. Optionality is an insurance policy against volatility. That's great. Yeah, it reminds me of Buffett saying that diversity is insurance against ignorance, right? >> Yeah. Um all right, so you're in the top 0.1% of most successful founders and investment professionals globally. So without sugarcoating it or making it polite, what are a couple of the reasons you got there while most don't that you haven't mentioned yet? Like what's at the core of you that might surprise others to hear? I I said I'm I'm I'm very very conservative. Um I I don't like noise. I don't I I just I just don't like it. And so I try to I try to surround myself with people who are conservative. And I'm not talking politically here. Like that's not what I'm talking about. Um my son is 16 years old, he's he's already pretty pretty progressive and liberal kid. And so that's not what I'm talking about. I I like people who have long-term thinking and will come to me don't bring me a deal. I'll tell you that right now.

24:22 I hate you know, to your point um risk is relative. Like you might like crypto and you're like it's not risky. I I don't know anything about crypto and I don't it's risky to me. And so like don't bring me a deal and put it in front of my table and say this is a great return, it's a conservative model. Like I I that to me doesn't it just doesn't sit well. Cuz your conservative versus my conservative, your return for at the end of the day, this whole world breaks down to risk reward. Our relationship, you know, we invest in it, we spend time in it, there's reward, there's some risk. You know, and so like I think that is and I'd say the last thing is you can only control the controllable. I'm a big systems theory guy. You have an input, goes into a system, it bounces around. I have a desired output with the same velocity and direction. Often times it goes off to this side and so many people spend their time trying to bridge the gap between the output and the desired output, right? We can only control what we can control, which is that input. And the sooner we realize that, we can only control three, four, or maybe five things, our life will be much simpler. And so that's something that I think I've tried to really do in

25:39 my life. So if I was to summarize a bit, like you're conservative, don't like big risk, you like optionality, you like control, you're a systems person, you want something that will scale. Um is there anything else I missed to your mental framework that allowed you to accomplish what you got done that you think we should emphasize? No, I believe in people. I believe most of the world's really good people trying to do really good things. And so when you see the good in people and and my dad said years ago, too often we judge people by their intentions and I mean by their actions and not their intentions. Yet we want them to judge us by our intentions and not our actions. And so the sooner we kind of work together, you know, I just I just believe in people. I believe um I would say one last thing is I believe that we're quickly moving into a world of increased fat tail risk.

26:37 Long tail has existed, um but fat tail is occurring. And with AI and with all the things that are happening, greater frequency of black swan events are in front of us. And if you aren't prepared for that, you are going to fail. I if I had one word of warning, that's that's my belief that fat tail risk is increasing um and it's enduring and there's nothing we can do about it. We can't guess when it happens, but if we're prepared, if we have good liquidity positions, if we're structurally sound, if we're around the right people that will go down the ship with us or whatever it is, um then we'll succeed. Got it. Great. Let's give him a big round of applause. Thank you. >>