Active to Passive Investing – Spencer Hilligoss

Spencer Hilligoss:
The big challenge is there’s this wonderful private market of opportunities. Right when you walk down the street, you see a big building. Someone owns that building. For most of my life, I looked at those things and thought, I’ll never be able to afford that. And that’s what most of us think, even if we have great w two income. So eventually I realized there’s not just one human being who buys these things. There’s teams. That’s what it takes.

Spencer Hilligoss:
It takes a village, it takes a team of people and immense amounts of capital to go and buy these big buildings, improve them, and hold them for long periods of time at a profit. The cool thing is, though, in that private market, no one is going to see these things, like floating around. You’re not going to see them showing up on an app in your phone like buying an index fund share. You have to go connect with people.

Dana Robinson:
Exit Plan is a podcast for business owners and those who want to be business owners. I’m always in search of the lesser.

Dana Robinson:
Known stories of entrepreneurship.

Dana Robinson:
In the exit Plan podcast, you’ll hear stories from startup to sale and hear from the professionals who helped business owners achieve their exit. Hosted by me, author and private equity manager Dana Robinson, along with my co hosts and guests, you’ll hear real stories, tips, and tools that will help you plan for the exit you want, whether you are still working at a day job or running a business. Let’s get started with this episode of the Exit Plan podcast.

Dana Robinson:
Hey, everybody, it’s Dana Robinson coming to you with the Exit Plan podcast. For those of you listening, you can’t tell that I’m wearing the shirt that I intended to wear to the gym and got stuck doing emails. And so I’m all cashed out. My guest Spencer Hilligoss here to talk about real estate, the business of getting into real estate. He’s done things way in excess of the things I’ve done, and anyone who’s followed me for a while has heard me talk about my experiences, which are good, bad, and ugly in real estate. So I’m excited to have a real estate guru to talk about all things real estate today. Thanks for coming on, Spencer.

Spencer Hilligoss:
Yeah, no, thank you, Dana. This is awesome. And by the way, you’re being very humble about your real estate experience as we were talking offline before we hit record. So depending on where we want to take this, I’m sure we could learn more about that adventure as well because, yeah, you’re not exactly a newbie yourself.

Dana Robinson:
Yeah, well, here’s what I love. I’ve been down the journey of accumulating some apartment complexes and then divesting those and then shrinking the size but increasing the value of my holdings. And I’ll tell you some horror stories, and maybe your experience and sort of how you’ve approached real estate can be teachable moments for all of us. But I always want to think about our listener as someone on their own entrepreneurial journey. And so before we talk about what you’re good at, I’d like to know how you got to do what you’re doing right now.

Spencer Hilligoss:
Yeah. Happy to. Like any entrepreneur, having talked to so many of them now, did not set out to become one. You know, I was in tech companies, financial tech companies in Silicon Valley, based out here in the Bay Area these days. Did that for 13 years, you know, across five companies, including Intuit, you know, company that makes Turbotax and Quickbooks, and a bunch of those competitors have intuit over that journey. I was the kid who started off that playing in punk rock and metal bands. I never thought I’d go into anything business related, let alone start leading big teams of up to 200 people for a Fortune 500 company by the time I was 26. Like, that was terrifying.

Spencer Hilligoss:
You know, it’s. And it’s the stuff that you just say yes to enough early in your career, and you find yourself in interesting places. But I also fell in love with leadership and management in that time during my w two track. But going back further, it’s. I have to mention that I grew up in a real estate household. You know, my dad was a broker for 30 years in the Bay Area. He had me, you know, cleaning out fridges for properties. When I was an early teenager, I was doing open houses.

Spencer Hilligoss:
Didn’t want them, but that scared me into tech. So in a lot of ways, I’m grateful for that full cycle journey because real estate brokerage is such a tiny slice of the world of real estate as you know. Right. And it really biased me away from that. The universe somehow called me back into somehow get involved in real estate. But in 2019, I pulled the ripcord, you know, walked out from the golden handcuffs, as it were, from the w two job, and went full time to run Madison investing, which is our investing club. And that was terrifying. You know, it was five months before COVID my wife and co founder of our company, you know, Jennifer Morimoto.

Spencer Hilligoss:
She and I, two separate w two incomes, you know, doing great, you know, stocking up those 401 ks for years until hit that point working at startups, where I was grinding out 80 hours a week, you know, in early stage startups. Sounds glamorous, you know, chasing that Google meta ipo money style of big financial exit. But in the end, we started having kids. You know, we’re growing a family. And once you, as a guy who’s navigated many of these similar challenges, I would say I hit the point where I just couldn’t see one of my sons for a couple weeks because I was just so heads down in that era and something had to give. And so I got very focused. And this is between the years of around 2016 to 2019, cranking hard, trying to find how do I actually get more involved in something that truly is going to develop more income streams for myself, for our family, that was just with our own capital, we’re just investing our own money into buying some rental properties. In hindsight, I have to say this is like.

Spencer Hilligoss:
Sounds like clear cut three phases in hindsight, but this was clear as mud, right? As it goes with everything else in life. Phase one, we bought a local duplex here in the Bay Area, spent like $430,000 on that for $200 a month in cash flow. Every real estate person out there knows that is pretty bad.

Dana Robinson:
That’s a low return, but I’m sure to appreciate it if you got it in 2019.

Spencer Hilligoss:
Yeah, we actually got that one at wallet earlier, so we picked up that one, I think, in 2016 or so. So great appreciation. Exactly right? So grateful for that now. But phase two realized our dollars are going to go very, very quickly if we keep buying properties like that. We looked to the Midwest, bought long distance, built up to a modest portfolio of five single family rental properties in the Midwest. About $60,000 per purchase price, which is mind blowing for you. And I sit here in the west coast. I think the average cash flow on those was like $250 a month, which is killer.

Spencer Hilligoss:
But then a year goes by, you realize, oh, wait, someone is like, the city or county is sending me a notice that there’s a couch sitting on one of these properties. Why am I getting this? We have a property manager. Oh, the tenants are turning over once a year, and they’re killing all the cash flow. So we go through that journey, realize rental management is not passive income. Like, it’s semi passive at best. Phase three we found investing in more private equity, investing in multifamily big apartments, still like that asset class, self storage facilities, stuff that’s big and boring sounding, frankly, and it ended up working very well for our capital. And it’s been more passive than anything else. It’s not perfect of course, in the current economy, not every deal has gone perfectly, but the majority of them have.

Spencer Hilligoss:
And we’re very happy with how that went along. That evolved into a business somehow. And long story short, that journey was clear as mud. I was just trying to grind my way into education, surround myself with mentors, and get involved in deals that were outside of this west coast market because the price points were very challenging to get into.

Dana Robinson:
Did you find yourself, you needed the day job while you started that journey for purposes of debt, right? I mean, you start in 2016, which is probably a great time if you. It sounds like you’re working your ass off, but other than the hard work, you had two incomes. W two s. That’s a great time. And inflection point, start building a portfolio of stuff you own entirely that’s not syndicated or shared with other partners.

Spencer Hilligoss:
100%, yeah.

Dana Robinson:
At what point did you have something? What was the plan to get out of working? So you start investing in real estate. You know, that’s going to be the journey you’re working from 2016 to 2019. Talk through the inflection point where you got to get out.

Spencer Hilligoss:
You know, that is. That question gets me fired up, Dana, because I think anyone who’s gone through the journey of like, hey, I’m going to escape the rat race. Right? That whole narrative, it brings you back to a place, mentally, that is one of extraordinarily hard work. But something inspired us to get to the point. Something inspired me to get to the point of saying, let’s get off our asses and go do something about this. And I was at my fifth startup, fifth and final, but it was also a real estate lender. You might be familiar with it. They’re still around.

Spencer Hilligoss:
They rebranded, but they’re the biggest fix and flip lender in the country. It’s called lending home at the time. And I was leading teams of people that were helping fix and flippers get loans to go and buy a single family home. So a lot in California, some out in east coast, I’m in the midwest, up and down, you know, all over. And I didn’t know what the heck I was doing from a, like, I had to manage team of loan originators. I was brought in to turn a team around, to grow the staff, to create a structure and leadership and a culture and all the big picture stuff without saying, wait, what’s a loan originator do? And you sound like a total dumbass. When you get inside of a company and you have people looking at you going, I’m going to report to this guy, he doesn’t know what that means. When I hit that point, I put my nose in the grindstone.

Spencer Hilligoss:
I learn voraciously, I read voraciously, I get my hands dirty. I saw about a year into that journey from the inside how much these real estate investors were making on these transactions from the inside, right? I mean, folks, I don’t want to be a flipper. I can barely swing a hammer, man. I am not handy. Like, I use YouTube every day for that stuff. And Jennifer’s more handy than I am. But I saw what they were doing in terms of building wealth, in terms of transactional volume, in terms of putting in wealth and then multiplying it. And so I said, there’s something there.

Spencer Hilligoss:
But the big point of inspiration, Dana, was I saw a group of guys who reported to me who were taking time after the workday was done, and they were working their butts off at night, like through the evening light. Lights were about to go off, but they had one light was on in one room in this startup company, and they were working on something. And I was like, they did excellent work all day working for me, working for this company. And something was happening with those guys. And I was like, what are they doing? They were building the company. It was a very, it was a warm, open culture. And I was sitting there going, two, two years into that, maybe two and a half years into that, I watched them go off on their own, build their own company and thrive. And I was like, well, if they can do that working the way they are, what the hell is my excuse? It’s inspiration, you know? And within that period of time, I read 24 books in a 18 month period.

Spencer Hilligoss:
You know, I listened to over 400 podcasts very similar to yours, just like quality education, stuff that you could pick up in the market. And that was the catalyst for it. So I targeted with Jennifer and I. We sat down, and we had the toughest, most valuable weekend planning session you could imagine. We got a sitter for the kids, and we said, how much income are we going to need to quit both of our day jobs eventually? And there was tears, there was reconciliation in those weekends. There was laughter, and we walked away knowing I, our numbers, within a certain number of years, I wanted to be able to quit. Wanted Jennifer to be able to quit. I quit in 2019.

Spencer Hilligoss:
She left her career in 2021. And I would say that as we geared up for that, I was targeting 70% replacement of my side of that income. That was the number I was going for. And so we hit those numbers. We actually hit them faster than we expected to. It started out with 15 years from now, we were going to quit. It’s too long. We came back and we’re like, how do we compress that timetable down? So then I got active and I thought, investments are one thing.

Spencer Hilligoss:
How do we build a business around this? And the catalyst was like everyone in my network was saying, we want in. We want in on these properties. You’re finding we went in on these deals and that was where the business started.

Dana Robinson:
Cool. And so let’s talk about that business. Certainly we can talk about it from the standpoint, it’s what you do now. So we want to eventually tell, tell people how to get involved with your business or connect with you and learn more about you directly. But how do you make money other than buying real estate and collecting $200 a month in excess cash flow and rent? What’s the business?

Spencer Hilligoss:
Yeah, it started out initially just saying, well, yeah, to your point, let’s go buy some smaller properties. Ultimately, it made sense to go get involved. I could wrap my head around the bigger apartments, like the bigger deals, because I understood the operations from corporate life. Right. And in the end, it was like, how do we go and get involved pooling together capital with ours to go invest? And we started doing more pooling of funds together to go buy a big thing we can’t buy by ourselves. And I’ve never wanted to be the lead operator, and so I have a deep respect for folks that have been such as yourself. It is an extraordinarily challenging order to go out and buy and operate a large apartment community or a storage facility or anything big in the commercial real estate space. But I went and, eyes wide open, I was like, I don’t desire to be the lead, but I do want to join and become a general partner on some deals with folks who we can tag team with and go buy some big property.

Spencer Hilligoss:
So that is ultimately where I went. We started buying some bigger properties in Texas and Dallas and then eventually out to the Carolinas. And after meeting some partners who I could join up together and form a GP team to buy some deals, I.

Dana Robinson:
Think for the sake of people who are interested in understanding whether their role might be passive investor or somebody who wants to do the same thing. You did talk about that. I mean, it’s a. I didn’t see anything in your materials that says it’s a fund, so it’s a syndication GP led with LP’s. Like, talk about the business of the business itself, because, you know, in all the real estate talks, I’ve had on the podcast over the years. We haven’t talked about it. So I’d love to, love to take a moment to teach.

Spencer Hilligoss:
Yeah, happy to. Well, you know, the big challenge is there’s this wonderful private market of opportunities, right? I mean, when you walk down the street, you see a big building. Someone owns that building. For most of my life, I looked at those things and thought, I can’t afford that. I’ll never be able to afford that. And that’s what most, most of us think, even if we have great w two income. So eventually I realized, oh, there’s not just one human being who buys these things, there’s teams, because that’s what it takes. It takes a village, it takes a team of people and immense amounts of capital to go and buy these big buildings, improve them, and hold them for long periods of time at a profit.

Spencer Hilligoss:
The cool thing is, though, in that private market, no one is going to see these things like floating around. You’re not going to see them showing up on an app in your phone like buying an index fund share. You have to go and connect with people and network. Thats ultimately where we came in is Madison investing? Started out, I was out there networking like a madman, flying out to these markets in the middle of the south, in the Sunbelt, out east, and looking for excellent teams that were finding excellent deals where we can go and buy that thing. But I cant buy it by myself, and I cant buy it with this partnership, with this team of really capable, experienced folks that are joining in a team with me. So we have to go build a team and help folks invest in that together. And that’s where folks in my network now, we have hundreds of folks from Silicon Valley, from all over the country now in our investing club. And we share the opportunities that float to the top of many of these deals that I look at every single month.

Spencer Hilligoss:
And we say, this is the one. We’re really excited about it. We’re investing in it. Come along with us and invest in it, too, if you want to. And so we also, we do that. We also do small funds as well. And so we actually just launched one of those this year. But it’s really about still focusing within real estate.

Spencer Hilligoss:
It’s just making sure that you can put your capital to use for a bit more cash flow so you can get monthly income or quarterly income. But yeah, it’s a wonderful world. I did not understand ten to 15 years ago, and I think that that is a very big education gap. I wish I had closed earlier in my life because I think our net worth would have benefited from that. But it’s just been a joy. Of course, there’s always going to be the occasional deal that doesn’t go perfectly, but frankly, the lion share has been very successful for us and has worked really well. You just have to know how to do the due diligence and vet the people you work with, because the people is the biggest risk, the execution risk. You buy a big property, someone’s got to run it.

Spencer Hilligoss:
If I put $50,000 or $100,000 of my capital as a passive investor or one of our group members does that, we want to know someone’s holding that, holding the wheel of this figurative vehicle very steadily and guiding it through to success so you can get a great exit at the back of that. So hopefully I didn’t go too niche on that for folks that are not as deep into the real estate world as you and I have been.

Dana Robinson:
But yeah, no, it’s a teachable moment. So I’m going to actually go even deeper. I’m going to reconstruct or deconstruct what you said and you chime in if I’m getting it right or wrong. For people who want exposure to real estate, for example, people who have a job or people who’ve exited a business and have some liquidity, they’ve got a couple choices. They can go buy like you did when you bought a duplex. They can buy like I have, buy direct and finance that, sign personal guarantee, decide if you’re going to have a manager or manage it yourself. And so this real estate exposure in that sense is active real estate investing and typically ends up with you as the property owner pretty actively involved, even if you have a management company. So you can get exposure that way, or you can become a limited partner in somebody else’s project of any size, whether that’s single family or portfolios of smaller properties or single assets.

Dana Robinson:
And in the case we call those LP’s or limited partners because they’re just going to put in cash, their only risk is that they lose their money. Now that’s a big risk, but it is big in the sense of not a high risk, but a, that you could lose everything. But that’s the same with the stock market. So you basically are buying stock. You don’t have general partner exposure for the liabilities of the, of the property. The, then you give the general partner who’s put that thing together, which is usually a partnership of multiple people, promote or carried interest depending on where you got educated. This is the, the fee that managers of someone else’s money earn on the increase in value. So you say to the LP’s, put your money in here and you’ll get a preferred return, typically.

Dana Robinson:
And then after your preferred return, I get 1015, 20% of the increase in the value of the asset when there’s a liquidity event or a refinancing. So then someone in your position, or my position, who’s an active real estate kind of player with some expertise, can get paid on the upside, but typically only after your LP’s have been made whole, plus some, some return that you promised them. So is that fair to describe the way you syndicate in real estate to get the capital side set up?

Spencer Hilligoss:
I am so happy with what you just said. It’s unclear how technical that we wanted to go. And I love, I love what you just said there, Dana, so much.

Dana Robinson:
I wanted to know this ten years ago, Spencer, I wanted to know this on how to buy businesses with syndication, how to buy real estate with syndication. So I’m offering this. If you’re listening to this, I don’t care whether you’re right out of high school and trying to figure your stuff out, this lesson here is worth listening to. Now, let’s talk about the hustler side. You’ve got the passive investors. They have a pretty decent deal. They get exposure to real estate, guaranteed upside, and then they’re giving you some piece of the upside after they get a return. So this is a good way to get exposure to real estate without working.

Dana Robinson:
Let’s talk about what you call the operator. So you’ve got a team on the ground, literally in the region, who knows properties. Then you’ve got someone like you that is working the syndicate side to get the LP’s in order, but also diligencing deals and doing your part. So let’s talk about how does that team work? How do the economics get divvied up, typically, and how does that turn into a business? And if someone’s going to invest in you, this is all in the paperwork. So I think it’s pretty standard fare to talk about and might help somebody who wants to be in your position ten years from now, once they’ve got a little their sea legs in real estate.

Spencer Hilligoss:
Yeah, the altitude we’re going on, this is really fun for me because I like to nerd out on it. You like to nerd out on it. So this is great, Mandy. So I would say that if you think about as an LP, putting capital in, as you said, your liability is limited. Very different than if I had that duplex and one of our tenants breaks their trips on a crack in the concrete driveway and they happen to break their ankle and then I’m liable to get sued. Right? So I think you hit the benefits and pros and cons of LP, the limited partner side, investor side. Well, on the active side for the GP, there is an immense amount of work that comes down first and foremost when we talk about, you know, the operator, and interchangeably, you will hear these terms in such a wildly confusing way across the real estate industry. I’ll never understand why I had to use so many different ways of saying the same damn thing.

Spencer Hilligoss:
Which is the sponsor, the operator, the GP team. There’s so many of the boots on the ground. These all mean the same thing most of the time, which is there’s a. There’s a team of people, or person usually, hopefully a team of people. You want to have them with experience and they’re out there intensely building a funnel, a marketing funnel and a acquisitions funnel to find great properties to buy. And they are doing this. If they’re doing it correctly, they’re doing it daily. They are looking at hundreds of properties on a monthly basis.

Spencer Hilligoss:
They are making offers on those properties just like you and I would. If we’re going to go buy a single family home, the key difference is there’s a lot more zeros. And depending on the market conditions, it’s going to be a long closing process with a lot of twists and turns, and it takes a lot longer to go buy that thing. But all of that is happening in the background. By the time that it comes out to this beautiful looking PDF document or investment summary with pictures and a pro form of financials that say, here’s where we’re going to buy it, here’s what we’re going to do to it. And that’s usually the business plan you see in a lot of these. If it’s there already, it’s a business or a building that exists, you’re going to buy it, do something to it, renovate it, maybe renovate it, modify it, improve it, upgrade it right now, convert it. That’s a lot of popular things out there.

Spencer Hilligoss:
Buying a hotel, converting that into something like multifamily, all of these are strategies, but there’s the team that’s doing that. Buying the property is a whole line of that business. It’s a challenging part of that business, fighting for that property. The next part is going out and doing like managing construction, changing the very makeup of that property to add value to it in some way, typically. And then last but not least, I mean, once that property is purchased, if this is a apartment building, for example, there are real human beings with lives, with families that deserve to have a compassionately run and great place to live. And you need to manage that property. And so you have to have someone running that asset, managing that property. That could be that team, that could be that same group of people who have their own property management company that bought the thing could also be a third party property management company.

Spencer Hilligoss:
And there’s many of them across the country, and that’s all they do. They manage big buildings of different types. And so if that goes correctly, if I’m a passive investor and I’ve trusted my capital, and usually folks are investing five digits in one investment, I’m hoping that they’re going to use those funds correctly to buy that property, improve that property, and ultimately, for all those financial benefits that you walked through a moment ago so eloquently, Dana, I will reap the benefit as well. But done correctly, when it comes to our side of this, for me, Spencer, Hilligoss and Madison investing is the business coming back to your question about how does our business make money? There is ideally the lion’s share of interesting outcomes, financial outcomes. The bigger swings typically come at the end. Done correctly, you’re going to get an improved property at a great sale event or even a refinance, a cash out refinance. You don’t see a lot of those right now because interest rates are high. But in an environment, in a few years from now, you’ll see more of those again.

Spencer Hilligoss:
And that’s the big, exciting financial outcome for folks on my side of it. There are other fees typically that can come along the way, but typically have not gone into this business to just make money on modest looking fees at the front end because I didn’t walk away from a high paying Silicon Valley tech job to go make small fees on the front end. We did this to go invest in great deals, exciting funds, and then if it goes well for everybody, the incentives are aligned and you have a nice big exit on the back. But you tell me if this is going into enough.

Dana Robinson:
Dana Robinson here. Quick plug for my book, the King’s Flyswatter. You can see it here me if.

Dana Robinson:
You’Re watching this, I’ve got it in my hand.

Dana Robinson:
It’s a beautiful hardcover book printed to.

Dana Robinson:
Make it giftable, something that you can share with a family member, buy as a gift.

Dana Robinson:
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Dana Robinson:
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Dana Robinson:
Yeah, no, that’s great. And I’ll just, I’ll throw some things in the mix, because, again, I think for the entrepreneurial real estate person who’s listening, who’s thinking, I want to do this, you’ll make most of your money on the back end, obviously, and in the meantime, there are other fees that get divvied up that are pretty standard in the market. If you’re the licensee and you’re helping broker the deal, then you or your management company might charge that. And that’s not going to cost your investors anything because there is a fee being shared by those brokering the deal. In some cases where deals are off market, you might have a finder’s fee because it’s proprietary. That’s an industry word for unbanked or unbrokered transactions. So you might be able to get a point as a finder for finding a great deal, maybe more, depending on the value you’ve created. By finding and setting the deal up.

Dana Robinson:
Sometimes there’s a deal fee for the deal team to get that thing through, depending on, again, sort of how much there is in commissions. There is an asset management fee that is typical in private equity funds. It’s 2% management fee, 20% carried interest or promote in spvs in these non fund vehicles. I’m sure it’s negotiated by your capital partners, but I see pretty typical a point and a half asset management fee going to the GP group, and it really keeps the lights on it. That doesn’t often produce the kind of money that you need to even pay principal salaries, but it does make it so that you can cover the cost of running your management company. What are the other fees that, because, again, if you’re going to build a business around this, and thinking of the entrepreneurial journey someone wants to be Spencer, what are the other things for them to be thinking about that they should be able to fairly monetize as part of the running of the business?

Spencer Hilligoss:
Yeah, I think you hit the lion’s share of the ones that we have experienced and built into our business over time, which is on the front end, you have acquisition fee, but we say no to deals left and right, just because there’s some deals that have far too high. I think that on the ones that we look at, market rate would be like something like one to 3%. But you do see deals now, they’re like up to 5%, in which case we walk, because that means that it’s just a little too attractive on the front end for the management team. Beyond that asset management fee. You hit that. I think that there is maybe a capital transaction fee sometimes, but these are not ones that we have baked into our business. Really what it comes down to is, I think, a modest, keep the lights on acquisition fee as a percentage, and then on the back, the lion’s share. The interesting part is going to be the promote or the GP equity when that thing exits.

Spencer Hilligoss:
And to be clear, we caught one heck of a good. I mean, when people say timing doesnt matter in real estate, time in the market matters, right? And do platitudes like that apply? Of course they do. However, you can also catch a good moment. And we caught a particularly good moment because we got into this in 2016, up through 2021. That was like a rocket ship call Covid. Technically, there was a little recession in there, but frankly, all that did was put more fuel on the fire that ended up culminating in 2021. So that we had, we’ve had, you know, 13 exits already just just from that run. So that, that said, I don’t want people jumping in saying, oh, we’re going to build this and the exits are going to happen and it’s going to be very predictable.

Spencer Hilligoss:
Nope. It’s going to be. But when you do it correctly over time, you’re methodical, you, you plan out and you have enough Runway for yourself and you don’t go spend and get live a too big of a lavish lifestyle because we, you know, we don’t try to ball out of control here or however people want to categorize it. We’re all about financial freedom for our family and for our lives and mobility. And, you know, you just got to plan that cash position and Runway to be able to go throughout those gaps before exits in the meantime. But one other comment I’ll make here, too, Dan, is that you mentioned spvs, for example. You know, we also like, just this year we launched an SPV, and that is slightly different.

Dana Robinson:
Right.

Spencer Hilligoss:
That’s a different vehicle where the fee that you mentioned is directly in line with the one that we take on that. But we’re investing into private credit and pooling our capital because the banking market pulled back, it’s harder for people to buy assets. So now becoming the bank is a pretty interesting way to get more cash flow along the way, solving a problem for them. But also it creates a nice cash flow in the meantime for anyone who’s managing an SPV like that.

Dana Robinson:
Yeah, I’ll just say the investor who puts into the SPV that’s loaning is after a different appetite for risk. Right. So they’re taking the bank’s position instead of the equity holder’s position. They get a fixed return basically based on the credit you’re granting. Yes, I was going to ask a question. Oh, pgs, do you find, I know that in smaller syndications, usually the promoter is going to be the person guarantor set up the credit and they sign a PG on behalf of the partnership. They take a fee for that. Are you avoiding in your deals, they big enough to avoid pgs.

Dana Robinson:
Do you just have enough equity in there? Is there an issue with someone who’s got to step up and sign a personal guarantee?

Spencer Hilligoss:
To date, we haven’t done it. I’ve been very tempted multiple times. I think that just to say it bluntly, given the current economic environment, I’m extremely pleased we did not because it’s a challenging environment depending on folks and deals that they were already in. And I think that personal guarantees, signing on the loan is definitely something that is monetized as a whole business model for some folks that are out there, folks with a big balance sheet, big net worth, and they want to come out and say, yeah, I’ll help you guys get this loan for 10 million, $20 million for larger properties. They will say, hey, I’ll take a half point, point, whatever is negotiated as part of that team. But we haven’t done that and maybe we will in the future. But it just hasn’t been part of our business model because I’m a fan of keep things as simple as you can and if we decide to go start doing that, it’ll be a thoroughly planned, in a very nerdy way, series of decisions before we kind of just start going and signing on loan docs.

Dana Robinson:
The last piece of this is I’ve seen some groups that grow sort of just the right size to have a captive property management business. Then their property management business is able to charge the management fees. This is different from an asset management fee. As anyone who’s listening heard me talk about, you get the GP group gets to charge an asset management fee, but for property management, there’s market rate depending on the type of property, and it’s a real estate broker operated management company. Are you able to run a captive at the size that you’re at, or are you just outsourcing that depending on the region to property managers, depending on the asset?

Spencer Hilligoss:
The good news for our business model is that we’ve worked with partners who ultimately are the ones making that call, and I trust them to do that correctly. So I would say it’s actually a pretty even split in the properties that we’re in in our portfolio, which is properties that are covered by third party property management and or properties that are done vertically integrated and they are profitable. You know, they’re profitable. It’s a hard lift to get property management off the ground, vertical integration wise. So I’d say that in most of those cases, when they got off the ground, it was slower than expected. But when it’s launched and done correctly, it does create a profit. And I think right now in this current environment, the properties that are benefiting from that are very happy. They’re very, very happy that they did that when they did that before they had to.

Spencer Hilligoss:
Yeah, I think one other comment I would make, and this is just because it’s so prolific in the real estate space. I haven’t gone and taken this step, but I myself have signed up for, oh gosh, over the years, seven different. Over seven years, I signed up for four different coaching programs and or mentors paid coaching programs. So I’ve paid for those before. Do I think that there is a ton of ones you have to run away from? Absolutely. But, you know, particularly just folks that are charging, charging a large four or five or even six digit number up front for to take on coaching students, but they themselves aren’t experienced enough to really deliver value for those people. That’s where you got to run away. But it is a real business line and it is something that I see a lot of folks in real estate, you know, go out and do.

Spencer Hilligoss:
So it has to be mentioned, I think, because it’s so prolific. But, you know, I would say take that with a big grain of salt because you have to make sure you’re at least coaching on something that you are qualified to be coaching on.

Dana Robinson:
Yeah, love it. Yeah. It’s a space that you’re right. Has a lot of people that are like, look at me and all that I’ve done. And you got to be careful for sure with any, any business coach that’s going to tell you how to, how to go make millions of dollars in real estate. Reading 24 books is a good start, right. As you know, preparing for your own career. Let me pivot and tell you a horror story and tell me what I should have done was hear it.

Dana Robinson:
I had just about 100 doors of apartments between three properties that were all about three blocks apart in downtown Phoenix and it was remote to San Diego. I thought, well, I could get there in 6 hours drive. I get there in an hour flight. That business took a ton of time. Now we ran it as owner managers, but you need on sites. And I had every version of nightmare that most people have experienced in owning real estate. In fact, I know a lot of people that have extremely successful who get out of residential real estate for some of the same reasons. I had a manager who was allegedly taking people’s, you know, using his keys to get in and people’s medicines were sort of depleted, you know, like, oh, my vicodins are.

Dana Robinson:
I only have half of what I thought I had the, you know, I went through a cycle where I hired a property management company thinking I professionalized. Maybe I’m the idiot. And then I found that the property management company had charged my home Depot account for $20,000 in paint and things that went to a property that their management company owned not too far away, just to round it out with three strikes. I finally gave up on onsite managers because it’s just too much authority and got an on site who just did maintenance because a lot of the, you know, when you have 100 doors, there’s just always something broken, something to fix. And he was great, fantastic guy, missing some teeth, but, you know, just did his job diligently, but had a friend, a girlfriend who allegedly was a drinker, who used his keys when he wasn’t around to go slowly sip everybody’s vodka down in their freezer, which I guess you realize, like, maybe my apartments weren’t in the best socioeconomic category if everyone in the building had a bottle of vodka in the freezer. But not to judge. And then, you know, that’s a huge intrusion that required me to replace a lot of vodka and fire a guy I really liked. So you know what? I ended up selling in 20, 1415, and 16 across those three years, and just bought smaller four plexes that I could drive to.

Dana Robinson:
In retrospect, I could have done a couple of things, and one of them is I could have just syndicated and then raised the money I needed to rehab these so that they were increase rent and sort of improve, which is a pretty common strategy in terms of syndication, because you need capital to go rip these things apart while you’re nothing getting any rent on them. I also could have just got out of that and invested straight up into the same category as a passive investor and probably done fantastic and never had my phone ring. Oh, yeah, a phone rang on my birthday one year, and it was, my sister was trying to manage the buildings for a few years, and she said, sit down. I am kidding. It’s my birthday. I’m at dinner. She said, I need your credit card. They dug a trench in the parking lot of one of the buildings, and they need $5,000 right now to seal the water leak.

Dana Robinson:
And then they’ll call you tomorrow for how much more it’ll cost once they’ve done that, to fill the hole and repave the whole thing. Is there an inflection point where you just have to stop being the operator and trust that a professional team is going to make you more money than you yourself are going to make in this game?

Spencer Hilligoss:
Thank you for sharing those. I mean, I really. One of the things that I could consistently come back to in my conversations, talking to LP’s, you know, just other passive investors who are only passive, they make great money in w two. Maybe they consult, whatever the conversation that always comes back that is extraordinarily valuable for them, and it was for me early on, is painting a picture about the realities of property management and whether it’s a small property, a duplex. You know, you said you went into some smaller properties after you sold those assets in Phoenix. Or if it’s, you know, managing a larger property, like these are real human beings. And along with, you know, what human, humans bring is stuff. The stuff comes up, real life comes up.

Spencer Hilligoss:
And sometimes that real life ain’t pretty. Yeah, but you’re the one ultimately who is managing that housing for them. So I would just say that really, the selection, I’ll say this, you made a comment there about the socioeconomic level of the people that are living there. And I would think that a lesson I wish I understood earlier. And I’ve heard this now from multiple really successful owners, people who have a billion dollars in assets and up the owners who’ve gone all the way and done this well, they will say, make sure that when you buy your property, management strategy matches your, your tenant base. And it sounds so darn simple, but you see a property management company that maybe they’re used to managing like a luxury class, a apartment building with beautiful amenities, a brand new gym, a pool, you’ve got pickleball, you know, and then, and then you’re like, oh, we’d love to hire you for this other property that we’ve got. And it’s a c class, you know, lower economic status neighborhood. And there’s nothing wrong.

Spencer Hilligoss:
Like we own pieces of both types of property. I mean, c’s, b’s, a’s, et cetera. But the mismatch creates nothing but pain and it’s just super predictable whether, you know, third party for sure. If you use third party property management, I also think just got to have like no one’s strengths. You know, like we’ve worked with one partnership team where they, they’re killer in terms of acquiring, they’re killer on the economics and structuring a great deal. But when they launched a vertically integrated structure and they’re like, oh, we’re going to go vertical integration, isn’t that great? And we’re like, cool, this is going to work well, within twelve months, went back to third party and it was because either you want to do it and you want to be great at it and you know how to go do that or you don’t. And just knowing that early, ideally before you pull the, the trigger on going one way or the other, is everything. So match it to the asset class ABC, but also just know what you’re signing up for.

Spencer Hilligoss:
If you’re going vertically integrated, I think is probably the two key takeaways because, yeah, I mean, probably the biggest specific story I’ll bring up, and it’s because it’s happened now, I think four properties over the course of five years is fires. You know, fires just like, like stuff that happens. Not necessarily. There was one arson. You got three people that lit candles in their units. You know, like. Like all those things. Things that just come up and the reaction speed and the way that that is handled, it speaks volumes about how that team is ready to go and tackle that stuff.

Dana Robinson:
Yeah. And to my point, that maybe, depending on where you’re at in your stage of life, investing with a group that’s spot on with that match up between the asset and the management, is going to be better than you trying to fumble around and figure out, how do I turn a unit that’s just had a fire, which is a delicate thing because it’s somebody’s housing, doesn’t matter that it’s their fault. You have obligations and insurance and, you know, the. All of the things that go along with that. So let me segue to the entrepreneurs that are at the place in their career where they’re listening to this, and maybe they’ve always thought of real estate as a big pain in the ass. And I’m validating that. It can be, and it is. And so you probably get a lot of this in terms of your LP’s, that someone’s like, all right, I get it.

Dana Robinson:
I’m going to invest. Talk a little bit about from the LP perspective. Like, do they have choice of kind of the exposure of the category they want? Do you sort of give people a menu and say, invest in the asset that you. That appeals to you the most, the different time horizons depending on the project and what people are planning on. Like, think. Think through your. I’d call it your customer avatar, you know, because you’re talking to the LP’s every day. Yeah.

Dana Robinson:
If I got an LP listening who now realizes they shouldn’t go buy a 48 plex like I did? What. What’s the move for you?

Spencer Hilligoss:
Yeah. You know, in our business, we literally have two key avatars. The first, I would say, is folks who are highly paid professionals, they’re making great w two income. I’ll bring up example of folks that work at Apple. We have a lot of folks at Apple, all the FAANg companies, they don’t want to quit imminently. Every once in a while, they want to go and buy something and think they can manage it remotely. And I got some wild stories about what they tell me about how that goes. Most of the time, I’d say it doesn’t go great.

Spencer Hilligoss:
Sometimes it does go well. But the second avatar is business owners, is folks that are in the middle of building that arc of their company, construction company owners, folks that do snow removal. It runs the gamut. It’s not just tech folks. We have folks across the country now, those business owners. My key takeaway is now, having talked to them, sometimes gearing up for their second exit, is that the skills that got them to build this business are also the ones that pose the highest risk for what they’re about to do with the capital that comes with windfall.

Dana Robinson:
Right.

Spencer Hilligoss:
Because they think me build, I’m going to use caveman language. I’m not doing it in a disrespectful way. It just helps me get my head around it because I’m a simple dude. Me build company, company go well, me sell company, me get windfall. Oh, what I do with money, let me go do what I know how to do. And they go and spend the exact same capital out to building something new and they think it’s going to go just the way it did last time and they burn it and or a big chunk of it.

Dana Robinson:
And hearing stories, yeah, 100% that it happened. It also happens. Silicon Valley, with people who get a win without having a loss first, as you know from being in five businesses, the, you know, if you need two out of three to either go sideways or lose for the one success, that you get to be a victory because you’re not going to make the same mistake that you just described with a caveman accent.

Spencer Hilligoss:
Which is, yeah, I mean, I got to boil it down simply sometimes, but even for myself when making notes, because in the end, like, similarly, the question I wrestled for my own money as a LP. So putting on the LP hat, back to your question, Dana, is what’s the goal for the money? And sounds so darn simple, sounds real stupid maybe for some folks, but I, when any of us looks at a incredible looking PDF document that has these pictures, it has this incredible looking annualized rate of return, or an IRR, the internal rate of return, some number that pops off the page and all logic goes out the window. I don’t care who someone is and how stoic they are. That’s how our brains work. And I have to mitigate that by saying, what’s the goal for the money? If I have 100k, do I want cash flow? Am I building towards something that is actually going to be a consistent stream of income that I can bank and bank on? Or maybe I don’t need that income. Maybe I’m covered. Maybe my business windfall and I sold it is. Was so big.

Spencer Hilligoss:
I don’t care about cash flow. I just want to preserve that capital, but I do want it to grow, you know, and it’s really those two doors. There’s flavors in between, sure, but it’s those two things. And so the way we approach it is we only share, you know, maybe somewhere between four to six deals to our club per year, and folks can participate. Once they join. Every single person that joins our group, I get to know them personally. Like, I. We build a relationship.

Spencer Hilligoss:
We haven’t done paid advertising, really, for this business ever. It’s all been referral based and. Or maybe sometimes folks from my network, or they might hear me on a podcast, just like we’re talking about right now, but most of it’s referral. And they will say, oh, look, here’s the merits of this deal. You know, Spencer shared a ton of educational content, why they’re investing in it, and they can opt in or opt out. You know, like, it’s a. It’s a long term relationship, because these things last five years, seven years. You know, it’s.

Spencer Hilligoss:
It’s not a. It’s not a, let’s go make a quick decision as a passive investor to go drop 50,000, 100,000, $200,000 into this thing. It’s a. It’s a real consideration. And I want folks to always feel like they have that choice to just take a year to even think about wrapping their head around how these things work if they’ve never done one before. And that has happened. I think the longest we’ve ever had someone join our club and then make their first investment was around two years. And so that’s absolutely fine.

Spencer Hilligoss:
What matters is we just want to invest alongside folks that are reasonable human beings that are out there to try to build their wealth and make smart moves with their money. And the key focus for us right now has been great deals bought at a discount, because right now, there’s some deals that are on discount. High interest rates makes properties cheaper. That’s just how this works in commercial real estate particular. So great deals are out there. We’re sifting through a lot to have to find them. The other one is really focused on private credit. And so that’s why we’re doing an SBV, and that’s open, and we’re doing that right now just on an ongoing basis.

Spencer Hilligoss:
Open ended fund where we’re putting our own money in and our investors and our club are saying, hey, I want to go put a chunk of cash in here to be able to get some kind of cash flow and growth on it, but on a different risk profile. To your excellent point you made earlier, which is, hey, if I can invest because banks are not lending as much, but there’s great properties to be purchased, how do we get our capital on that side of this equation?

Dana Robinson:
Yeah. Love it. Well, Spencer, we’ve run up button up against my usual time where I start winding things up. Is there anything, well, before we wrap up, certainly want to tell people how to connect with you, but is there anything you think of that we missed in our sort of the flow of our conversation?

Spencer Hilligoss:
No. This has been a blast. Thank you so much for going deep on the stuff that I know you and I appreciate. If I could leave people with anything, it would just be maybe one book recommendation and one piece of advice I wish I had gotten earlier.

Dana Robinson:
Great.

Spencer Hilligoss:
Favorite book still is in business would be essentialism. I like essentialism a lot. Basically taught me that you could say no to stuff that is not in your priority list.

Dana Robinson:
Simple book. Simple book. It’s mcCown, right?

Spencer Hilligoss:
Yeah. Yeah, Greg. Yeah, Greg McCown. Yeah, Greg McGown. Piece of advice would just be, man, I wish I understood early in my career that every person you encounter is a relationship. It’s not a transaction. And that is some just timeless killer. Arguably some of the most valuable insight that I’ve ever heard.

Spencer Hilligoss:
And I, I didn’t get that for my entirety of my twenties, I think maybe even some of my thirties. And I’m always going to be reminding myself of that now because it’s amazing how the world comes back around. And the more that you give and the more you treat that relationship as something authentic, it will benefit you and them.

Dana Robinson:
Love that. And you know what? It’s my turn to plug myself because I usually don’t. Ever. Everyone, reminder, I’ve got 13 courses on LinkedIn learning. I make, it’s tiny slivers of pennies when you watch those, but they’re there for, for give back as well. Three of them are on networking. Networking is the most critical piece to my career that’s enabled me to live the life I got. However you want to find success, to me, the freedom that I have is the success that I need.

Dana Robinson:
So check out LinkedIn learning search Dana Robinson and you’ll find all my courses and watch those networking courses. No matter how young or how seasoned you are. I think that’s a good point for bringing up Spencer. Thanks.

Spencer Hilligoss:
That’s awesome. And I just want to mention, I forgot to mention we’re at madison investing.com dot. So that’s our that’s our club. URL.

Dana Robinson:
Madison investing.com. and you’re, of course, Spencer hilligoss. H I l l I g o s s. Easy to find on LinkedIn as well. Everybody connect. And if you have questions, comments, anything you want to send along. Hello@danarobinson.com. thanks for being on the exit plans, spencer.

Spencer Hilligoss:
Oh, it’s been a blast. Thank you so much for having me on. Dana.

Dana Robinson:
Thanks for joining me on this episode of the exit Plan podcast. I’d love to hear from you. Feel free to hit me up with questions or comments by emailing me at hello@danarobinson.com or leave comments and questions by calling 858-252-7785 call 858-252-7785 and leave a message.