Robert Leonard  01:44

For those who may not have heard your episode on the Millennial Investing show, walk us through your background and how you got to where you are today.

Spencer Hilligoss  01:52

I currently live out here in Alameda, California, which is in the Bay Area. For those of you guys that aren’t familiar with that, Alameda is just a cool island that’s tucked between Oakland and San Francisco, California.

I, just two months ago, quit my previous career of 13 years, and that career was in Silicon Valley start-ups. Think of that as the local business. It’s a pretty scary step, but it wasn’t quite as scary as most people probably think about it, when you go away from a W2 job, really stable income; you go out, and you go full-time into entrepreneurship as an entrepreneur.

I think about going all the way back to my upbringing. My dad was one of the top-performing residential real estate brokers in the United States back in the ’90s. I got exposed to that lifestyle and all the benefits that come along with it pretty early. He made me work open houses for him at the age of around 15. I absolutely hated it at the time. I did take away quite a few learnings from that experience, but all in all, life was pretty good around then.

We had a prosperous few years, but just after that, my family entered a time that we called, “the dark decade”. It was brought on by a couple of key things. My younger brother, Justin, passed away from cancer; drug battle for a few years. It led to a divorce between my parents, which is pretty common in most scenarios, and frankly, a total devastating financial kind of downfall for my whole family resulted from those events.

I bring that up because I watched all that unfold. A lot of that occurred right around the time I was about to leave college and go out into the working world full-time. At that point, I had done a few internships, and I had worked really hard at college jobs, making $6 an hour at a catering company and all that other kind of stuff. The stuff you do, when you’re younger.

I bring all that up because what I learned and observed from that whole experience with watching my dad and our family go through that financial devastation was, “How could we better protect ourselves? And how could I have helped more?” Now, I’m a parent. I have my own two young kids. So, I wonder, “How can I protect my family from that kind of financial devastation?” When you’re a broker like my dad was, when you stop doing those jobs, the income stops flowing in. That’s why we call them active.

On the flip side, there are all these different ways of actually bringing in predictable income and ways that don’t require you to constantly be on. I looked at those series of events with my dad and my family. Going through that as a way to get a spark of inspiration around how to be financially defensive, and how to have a financial defense mindset.

I bring that up because, just flash forward to 2016, I was five software companies into my technology career, and I was sitting there going, “Man, you know what? Life’s pretty good, but I’ve been doing this 60 to 80-hour a week grind at tech companies now for the last 13 years,” and I had a 401(k) account that I was proud of, but we didn’t really have an exit plan. We didn’t have an exit strategy. We didn’t have a way to go and just say, ‘Okay, if we continue on this path, how do we get off the train?'” 

At the current path, I basically would have to bank on what so many people in Silicon Valley expect when they join start-ups, which is someday, with that equity from their company that they get as an early joiner, whether it’s a Series A, Series B, C, and beyond, they get that equity. They expect that to be their Get Out of Jail Free card, when that company finally has a big liquidity event like an IPO, or they get acquired, or you know, the other versions of those things.

All of that said, I didn’t see that materializing for us, and that scared me. That’s the opposite of being financially defensive for my family. What happens if I get hit by a bus? What happens if I have a debilitating disease? Of course, my business partner and my wife, Jennifer, has a very successful career of her own. We would still have meaningful income coming in, of course. But to do my half, I wanted to make sure that I protected against that.

So, my most recent company was called LendingHome. I was building their origination teams there. We’re doing 600 loans per month. These are flip loans. When I joined, they were doing about 150, and when I left they were doing 600. I learned residential investing that way, but I really, really didn’t want to be a flipper. So, I got the bug. I got the bug on multifamily. That means, man, I read 24 books just to dive into it. I listened to over 400 podcasts, and I just ravenously became obsessed with learning and ramping up on this knowledge.

Flash forward to 2020, we are now 18 deals into building a business that started just as us being passive investors, you know? We started being what’s called limited partners and passively investing in multifamily because we found that to be the most appropriate way to invest in real estate; to generate a monthly income that didn’t require harder work. It’s just investing the funds, signing the paperwork, and doing the diligence upfront. Very organically, we built a business out of that.

Now, just two months ago, as I mentioned upfront, I quit that career entirely. It was bittersweet. I had to say goodbye to my team, and all these different awesome benefits that come along with being a W2 employee. But every day I wake up with such an awesome inspiration; with a sense of joy. I still work incredibly hard, but it’s on my terms. And I find that to be really fulfilling.

Robert Leonard  07:36

Going back to the beginning of your investing journey, before you were able to quit your full-time job, you were investing in single-family rentals and turnkey properties. For those who haven’t heard the term turnkey, what is a turnkey property?

Spencer Hilligoss  07:49

Turnkey properties have a polarizing brand out there. Some people think they’re amazing. Some people kind of say, “Stay away.” But here’s what they are. Most people are familiar with a single-family home because we’ve lived in them at some point. A single-family rental is just a home that’s now being owned by a landlord that’s being rented out. 

A turnkey property means that if I’m the investor, I can go and find a company that’s a turnkey provider. They will sell me that single-family home. They will already have placed tenants that are paying the rent. They’ve signed the lease, and that property is already in great condition, or I should say, good enough condition, so it doesn’t have any deferred maintenance. 

So, when you buy it and take possession of it, you don’t have to go in and invest tens of thousands of dollars just to get that property in livable condition and rentable condition. The last but not least part, which is probably the most important part of a turnkey property that makes it interesting to people, is it also comes with the property management relationship built-in.

Robert Leonard  08:58

You realized turnkey and single-family properties weren’t scalable, so you transitioned to larger deals through syndications. Why aren’t turnkey in single-family properties scalable?

Spencer Hilligoss  09:09

We did realize that, at some point, they weren’t scalable, because we wanted to achieve our goals in a much faster time table than originally forecasted. We ran this exercise, and we looked at it and said, “We want to be financially free.” If you define financially free as we have enough income coming in in rental income and cash flow to cover all of our expenses, so that if we just stopped working, then we’d be good to go. So, we ran this exercise, and we saw that if we just did the single-family home path for that, it would take us 15 years. That was too long. We wanted to chop that in half.

So, we looked beyond the turnkey, and the single-family home strategy, because it just wasn’t enough. It wasn’t fast enough. We wanted to compress that timetable. We realized that we were going to have to go and look up the market, and that bigger is better. We started to invest in multifamily apartment syndications, and they’re pretty large. You can invest in any apartment size. Of course, if it’s like 10 units, 20 units, 50 units. We particularly are interested in large apartment communities. So these are like 150 units plus.

There’s a ton of great reasons to do that. One of the things that I appreciate about large apartment communities is stability and predictability. Let’s say, you have a 400-unit apartment community, and one of those tenants leaves. Now you’ve got 399 occupied units and one empty one. Now, if I did a similar scenario to one of our single-family homes…true story, we’re literally dealing with an eviction on one of them right now. The occupancy level on those turnkey properties, on that one turnkey property with the eviction, rather, it just went from 100% to zero overnight. That learning for us, it just made it very real that we’re going to have to look elsewhere for something stable, predictable, and moves a lot faster in terms of returns, so we ended up going to real estate syndications.

Robert Leonard  11:22

What exactly is a real estate syndication? We hear this term often thrown around in the real estate space, but give us a definition of what a real estate syndication is.

Spencer Hilligoss  11:32

Syndication, if you’re not familiar with that term in this context, basically means just a bunch of people pooling their capital and their resources together, and buying something so big that they couldn’t have purchased it alone. That’s all it is. It’s just a pooling of stuff together. Everyone goes and buys something bigger together.

Robert Leonard  11:54

I know that not everyone is legally able to invest in real estate syndications according to SEC rules. So, what does it take for someone to be able to invest in these types of deals?

Spencer Hilligoss  12:05

What’s interesting about the SEC criteria are the thresholds to meet accredited investor status. That is a status that is defined by the SEC on paper pretty clearly, but it still leads to some confusion. It’s because there are two ways to qualify. You either have to make enough money income-wise, so you can qualify from your income, or you can qualify based on your assets.

If you qualify based on your income, it’s $200,000 over the past two years, and then you expect to make $200,000 this year as well. That means you can qualify by raising your income to be an accredited investor. On the other side, for assets, if you have a net worth of over a million dollars, not including your primary residence, then you can qualify based on assets. 

The vast majority of folks out there, if they do qualify for an accredited investor status, then they will meet it based on income. A lot of folks in the coastal markets, particularly here in the Bay Area, they hit it because of the income levels, and they have higher salaries that come along with the market.

I want to bring up that definition of accredited because I would say that the vast majority of syndications that you find in the direct deal space. By direct, what I mean is you go find an operator or a sponsor. Those are the folks that are putting this together; a deal like this, who are looking for others to invest in them passively. They will typically expect you to be accredited. Some of them do allow non-accredited investors, though. A limited number of them. But the burden does fall on them to make sure that if you want to go out and invest in one of those deals, you have to study a little bit. I mean, you just have to know what you’re getting into because that sponsor is not allowed to take your capital if you are not what’s called a “sophisticated investor.”

Robert Leonard  13:58

As you get into larger real estate syndications, you start to compete with private equity firms and other larger players in the real estate space. Let’s just take Grant Cardone, for example. How does this impact the returns of a syndication deal? What are average returns to an LP (limited partner) for a typical real estate syndication?

Spencer Hilligoss  14:17

You know, it’s so interesting to look at the sizes of these properties, these apartment buildings, and communities that are out there. If you look at the ranges and sizes, we’ve closed on deals that are about $10 million, $20 million, $40 million, all the way up to $80 million, and you don’t necessarily see institutional competition until you start getting up to that $80 million to $100 million purchase price. There’s a whole wonderful, amazing network of folks that focus just on like the mid-range of $20 million to $40 million properties. And so, the competition shifts depending on what size you’re going for. We don’t necessarily always go for the stuff that is competing with institutions to acquire them.

Let’s talk about the returns that you asked about. I’m only going to speak about our personal experience, as putting our capital into this. So, please take this with a grain of salt. This is from our LP investing experiences. We typically are looking for probably an 18% to 20% plus annualized return. Set another way, during that whole period like if we put $100,000 of our capital into a syndication, I would like to see that translate over a five-year period, because most of these things are like a five-year hold, into about 8% or maybe 9% monthly income. 

And I think it’s annual income broken into monthly chunks, right? So, it’s like $100,000 that you put in, you’re talking on average, $666 per month for a five-year period. In the end, you sell the property, and then you get a big sale’s proceeds check. In the end, assuming that the value has been added. The price is where it needs to be.

Robert Leonard  16:08

Everything you’ve talked about so far about syndication sounds great, but what are some of the downsides to a real estate syndication?

Spencer Hilligoss  16:16

I’m super upfront about these because I think it’s about strategy matching. So many folks love to ask, “What’s the best investment battle? Is it flipping? Is it wholesaling? Is it multifamily syndications? Let’s compete against asset classes. Is it self-storage? Is it mobile home parks?” It all comes down to strategy. The strategy for you will be very different than that for me, Robert. 

So for us, we are interested in generating a certain dollar amount of monthly, quarterly cash flow. That just means mailbox money. And so for that, syndication is a great fit, because we want to be fully passive. By the time that our kids are a little older, we want to be fully passive, so we can go travel the world. You know, take them on some trips. Maybe even live abroad, and not have to worry about working full time.

That is not a good fit in terms of syndication investing for an investor, who really likes to be hands-on. A bunch of folks that reach out to us to potentially join our club, a certain profile of folks in that group might come from a background of being hands-on handy like former GCs (general contractors); folks like our architects. 

People who love to be involved will not have a great time or experience in a syndication that’s totally passive, because they like being in the guts of how these things work. They want to be active. They don’t want to be passive. 

So, I don’t think that it’s a great fit if someone wants to go and be part of the syndication. They might probably want to just go buy a rental property and do it themselves. It’s like a rehab, a flip, or a BRRRR. If you’re familiar with the BRRRR strategy, that’s a really good fit for someone, who wants to be more active and nerd out on it, operationally.

Another downside, I would say, is that you’re putting your trust into another person. I feel really good about vetting that type of stuff because I have 13 years of large and small, high-velocity team building. I have interviewed hundreds of people. I have hired hundreds of people. I’m pretty darn good and very experienced at vetting people across the table for me. And if you are not experienced in doing that stuff, you got to be careful with jumping into deals and syndications with other people, unless you feel like you’ve really got a good understanding of their experience level.

The example I will give you, in terms of our vetting criteria that we use, is this notion when we’re vetting the track record. There are five big buckets of things that we vet. We look at their track record. We look at their values. We look at their approach. We look at their team, and we look at their communications. Within those buckets, there’s a spreadsheet that has a ton of questions. There are over 50 questions that comprise this framework, just about the sponsor.

And so going into that, we look for this thing called “failure response”. I would ask one of the sponsors that we invest with, “Tell me about a time that you got figuratively kicked in the teeth. As an entrepreneur, what was a time that things didn’t go the way that you wanted them to? I want to hear, ‘How did you get through it and what did you learn?'” 

I bring that out for the question around my downsides, Robert, because I think people don’t realize how critical it is that they vet how that sponsor responds. Markets rise, markets fall. We know it’s very likely, particularly in a time like right now, with a potential black swan event going on right now with the coronavirus stuff. 

We don’t know which way it’s going to go, but what matters is that the capital we have put into a bunch of these syndications is going to be responsibly managed. The decision making under duress, if you want to call it that, from the sponsor is going to be sound. It’s not going to be emotional. It will be something that they’re able to keep their hand firmly on the wheel and just make good sound judgments, non-emotionally.

Probably the last, but not least for downsides, I would just say, “It is so critical as you’re putting your capital into an investment.” Sometimes, we would get a question from an investor that says something like, “Well, I’m glad we’ve talked about this, Spencer, and this sounds like it’s something we do want to invest with alongside you. So is that 8% return guaranteed?” 

If I get a question like that, I immediately get very worried that the person hasn’t necessarily been listening, because this is not a savings account. It’s not a high-yield savings account, right? You can lose all your capital. A total capital loss is very much a possibility, and it’s so important that people understand that. You can lose all your money. I call that a downside.

Robert Leonard  21:03

If someone is looking to get started in real estate investing, would you recommend they start with their properties, whether it be single-family or multifamily? Or should they save their money and passively invest in other people’s deals?

Spencer Hilligoss  21:16

That’s a really tricky question to answer in a generic way. The reason being is because it comes down to your goals. The order of operations for a person to go answer that question in their journey comes down to these three steps. Number one: goals. Number two: strategy. Number three: tactics.

And so, unless I know your goals, your specific goals like maybe your goal is you want to build a thriving real estate business. You want it to be something so successful that you can leave that business to your children, and you want this to become like a family business for the next 50 years. It’s a very different goal than, “I want to go sit on the beach 10 years from now,” or “I want to go travel with my kids.”

Because if someone wants to go, and let’s say that they don’t have capital upfront; if you’re capital constrained, here are the three things that are limiting factors. If you want to sound cool, you can say, “LIMFACs.” Such a corporate thing of saying it. You have experience, time, and capital. Those are the three limiting factors that should come into play, in my humble opinion, when people are trying to decide what is the right goal and strategy to match that goal.

Most people are starting with limited capital. If you don’t have capital, you need a means of getting capital. For a lot of people, that’s their day job. If your day job is not producing enough capital, you should evaluate trying to increase your income with that day job somehow. Meaning, do better and get promoted, or go build a side hustle, or go find a new job and negotiate for higher income.

You need to go get the capital first, and then go do the passive income track. I do think that that is informative. If you’re out there wrestling with, “Man, I’m finally going to save up that $50,000, so I can do my one syndication investment next year.” You might not be a great fit for this strategy. It’s capital intensive. If you want to do 100% all passive in syndications, you will need to find a way to repeatedly go find more capital to invest in these syndications.

If you are interested in both learning and you’re willing to make big changes. And you want to get active like you want to be an active operator. You want to be in real estate. You want that to be your job. The first step I’d recommend, personally, is going and changing your career to a real estate career in your day job.

That is a really good thing to go do. I feel very thankful that I somehow stumbled myself into a real estate lending company called LendingHome, and that was one of the first introductions that I had in my adult life into real estate. I think that that’s a really, really smart and fast way to get ramped up quickly and make an income to get capital.

So, if you don’t have capital, I would not go do syndications because you won’t be able to find any deals to invest in, and you don’t have the money to do it. If you are starting on the other end, you do have capital, and you’re more comfortable with single-family homes and taking longer to reach your target, go do single-family homes.

 If you like the most passive of all options, you want it to be the most recession resilient, you have capital, and you don’t want to spend time managing these things, you will not find a better type of asset class investment and structure than a real estate syndication for a multifamily apartment.

Robert Leonard  24:29

What is a common piece of advice you often hear given by real estate “experts” that you don’t necessarily agree with? What is the actual truth?

Spencer Hilligoss  24:38

I think the common piece of advice that we often hear from real estate experts, that I don’t necessarily agree with, is that you should go out and do what I did when I first got into commercial real estate. I went out and I read 24 books and listened to 400 podcasts. A lot of the real estate experts out there these days will say, “Go try to devour 1000 books and get on every podcast.” 

You don’t have to do that. What you need to do is start with the goals, refine your strategy, and then plan out some tactics you should focus on. That way, you can be way more surgical in the way that you learn this stuff. I am more than happy to always give some pointers and give some links with educational resources if folks ever want to reach out.

Robert Leonard  25:21

For those listening today that might have more questions about real estate syndications or just how to get started, where can they go to connect with you?

Spencer Hilligoss  25:28

You can reach me at spencer@madisoninvesting.co. Of course, we have a website at madisoninvesting.co, and I’ll be happy to help you.

Robert Leonard  25:37

Spencer, as always, thanks so much for your time.

Spencer Hilligoss  25:40

Robert, thank you so much for bringing me back on. I’m looking forward to our next conversation, and hopefully, it’s sometime in the near future.

Robert Leonard  25:47

All right, guys! That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro  25:54

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