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May 9, 2023

Investments That Pay Monthly, Year One Cash Flow With Spencer Hilligoss [EP152]

Today we have Spencer Hilligoss on the show! Is your day-to-day job leaving you too little time to spend with family? Spencer Hilligoss was in the same boat and decided that it was time for a change – he started making investments that pay monthly, and changed his life forever.

Spencer Hilligoss spent 13 years in Silicon Valley tech companies before he became invested and partnered in over 40 large real estate deals split between large apartment communities and self-storage facilities in the sunbelt of the United States. Despite growing up in a real estate household, with his dad as a broker who made him work open houses as a teenager, Spencer was initially scared off by the industry and opted for tech. But now, he is thriving as a successful real estate investor and is particularly fond of the Texas market.

In this episode you will learn:

  • the typical three phases real estate investors pass-through
  • his experience investing seven figures into real estate syndications
  • focus on the "who"
  • what is the goal for the money
  • his seven-point investor guide

Table of Contents:

From Silicon Valley to Multifamily Investing

Photographer: Hardik Pandya | Source: Unsplash

Darin: Spencer Hilligoss lives in California with his family. He spent 13 years in the tech field before investing in real estate. He's seen how it's changed his life and he wants to share his journey with others.

Just a little bit on how we know each other. This is our first time talking, but Spencer is all over social media and when it comes to multifamily, he has a ton of experience. So I am so interested to learn from this guy and I look forward to bumping into him at multifamily conferences going forward. With that, can you share with the listeners kind of your background, how many properties, and how many units you're invested in?

Spencer: Yes, and thanks again for having me on, Darin.

Darin: Absolutely.

Spencer: The feelings are mutual. You put out a ton of educational content out there for the benefit of all, active, passive, and beyond, so thank you. As a guy who spent 13 years in Silicon Valley tech companies, it sounds a little strange to say out loud, but at this point, we are currently invested and/or partnered in over 40 large real estate deals. That is split between large apartment communities and self-storage facilities spread throughout the Sun Belt of the United States. You know that very well, you are seated in part of that Sun Belt, my favorite market of all of them right now in Texas. But that's been quite the journey going from grew up in a real estate household with a dad as a broker who made me work open houses as a teenager.

Discover How To Save Taxes and Build Wealth

Investments That Pay Monthly Are Not Cool

Spencer: There's photo of me sitting on a plot of land he was selling back in the '90s and all that scared me into tech frankly.

Darin: Did it really, why?

Spencer: This sounds so silly and I'm kind of making light of it. But it's not as cool to say to your friends you work for a real estate company when you're sitting there in the heart of Silicon Valley and the next Google and Uber and Facebook are getting built, of course.

Darin: That's true.

Spencer: In hindsight, there's a reason a lot of really great successful wealthy pay-it-forward people end up in real estate ultimately. And that's because that's the biggest wealth driver that everyone in the world uses. I ended up here anyways, Darin, it's just through a different lens. But none of us want to necessarily become our parents in our teenage years. Somehow we end up there somehow.

Darin: I've got two college-age kids and my oldest, my son is going to be graduating from A&M in the next few weeks. My daughter is just starting out college in Florida on the West Coast.

There comes a time where it doesn't matter what you do or what your experience is, that you want to get advice from other people. And so, there's other people that have a bigger influence on them than mom and dad at times.

5 Step Process Ad

Spencer: Totally. Kudos to you on getting them to college age though.

Darin: It's funny how you came full speed ahead. You have kids? What ages?

Spencer: Our boys are younger. We have two of them. One just turned nine yesterday, the other is five. Little dudes.

Hacking Through With a Figurative Machete

Darin: Little dudes. It goes by fast, my friend, so enjoy it. First of all, maybe just share a little bit on when you started investing. Because my understanding is you started investing as a passive with your own capital. Then you started to branch off and at one point you left your tech job and went full-time. And then you started bringing other people under the fold. Maybe can you walk through that history a little bit.

Spencer: Happy to, and you could probably attest to this as well, Darin, in your own journey, but in hindsight, it's all clear. There's clear phases. I could think of three of them. Going through this at the time, I have to say this out loud, clear as mud. You're hacking through this with a figurative machete, questioning everything from time to time, having big wins, learnings, losses, all the rest.

But we started out, I've worked at five FinTech or financial tech companies. Starting with the biggest one many years ago at Intuit Company that does a third of the country's tax return through TurboTax, et cetera, a lot of similar style of companies. I was building teams and operations groups and those types of companies, those are hard hours.

Giving up Silicon Valley for Investments That Pay Monthly

Spencer: I believe in your background you had a run in technology as well, and I was working in earlier-stage tech companies, Darin. Those were the earliest years for our firstborn. Didn't see him as much as I wanted to. There was a solid two-week period back in around 2016 or so when I don't think I saw him for a two-week period. Because I was going in when the lights were off, it was dark out in the morning, it was dark when I got home. The Silicon Valley lottery as it were, just to give this context, it's like this unwritten dynamic where folks want to go in and get a piece of equity in the next big company that can have a huge exit, right?

Darin: Yes. Absolutely.

Spencer: Huge, huge exit. Absolved my financial sins, right? In the end, that just doesn't work for most people. We were unofficially running that playbook in our household. Jennifer, my wife, and she had her own career, I had my own career, but we eventually got the bug and said like there's just got to be another way here. That was the spark when I was at my hardest of a hard point in that career and I didn't see an off-ramp from that lifestyle.

We were doing good, great income. I don't want to make it a small thing. I really enjoyed my W-2 career, most of it, but making great money in a very expensive market, not seeing your kids enough, and not striking anything remotely resembling a balance eventually has to give.

Majority Starts With Investing in Single Family

Spencer: So, we started looking at rentals, spent a whole summer in phase one. Bought a rental, took us all summer to buy a rental locally, $430,000 purchase price for $200 in cash flow net. That is not what you call a cash flow win. That is a quick way to run out of capital. Phase two, we kind of got the message from that learning, we still own that rental now. Sure, it's got good appreciation, but we started buying rentals in the Midwest.

We got up to five, 60K roughly average purchase price, and ultimately we got to 250 bucks a month in cash flow, which sounds pretty damn good on paper. But then you consider things that people don't teach you until you go through it. Like when one single family home that's in a C-class neighborhood, that tenant moves out, or you have to help them move out for the right reasons, not easy to do. Ultimately, that's going to go from 100% occupancy to 0 overnight. We've since sold those properties.

Darin: It's crazy because we're going to get into the multifamily world, but that's where most people start though, is buying a single family or even a duplex. For myself, it was a duplex and it is crazy when one tenant moves out, you can go from 100% to 0%, or in a duplex I went from 100% to 50%. Thankfully for myself, and it sounds like yourself as well, you had a good income so it probably didn't impact you as dramatically. But some people, that cashflow, they're looking to use for their living expenses and that's a huge hit.

There Is Lesser Risk in Multifamily

Darin: When people have asked me, well, should I start small or getting a large scale multifamily? It sounds funny, but there's less risk when you have 70, 80, 100, 200 units, you're always going to have some vacant, but you got the cashflow from all the others and you're not going to go to 50% or 0%.

Spencer: God, you nailed it. It does sound silly to most folks from the outside who haven't had some of these experiences that you and I have. I forget that sometimes. Because you get down this wonderful fruitful rabbit hole of these bigger properties and you forget that is the most relatable experience that anyone out there who eventually buys a home is going to go through.

They think, I'm going to live in an apartment, sure, I'm not going to go buy an apartment building. Because people with way more money buy those, I can't afford those. But they don't really realize what I got to in phase three after we went through a rental phase and sold them, which was like, "Oh, there's these things I can go and buy a piece of an apartment building. That's weird." That was my first reaction.

But I really got stung by that management experience, and we were still using property managers by the way. Whenever someone tries to tell me, "Oh, rentals are passive." I'm like, "Show me one." I'm not anti-rental, there will be a time when our kids are older, perhaps, and we buy some more single family home rentals probably. But two working folks, busy careers, young kids, fielding calls from a property manager, you're paying 10% to, that wasn't a good fit for our life stage.

Procrastination Blocks You From Investments That Pay Monthly

Procrastination Blocks You From Investments That Pay Monthly
Photographer: Photoholgic | Source: Unsplash

Spencer: I had exposure for phase three before I kind of got to this corny third phase of this three-part journey. Before we invested our money into our first 25K, that was the first 25K investment we made into an apartment syndication. I was working in the guts of the biggest fix and flip lender in the country and it was a tech company first. But it used to be called LendingHome, now it's rebranded as Kiavi, just to give them a plug. Not being paid to say it, I think they're doing good stuff. I was brought in to grow their origination groups, and we were doing 600 fix and flip loans per month at the time.

And I had a lens that was very limited on real estate. I was seeing the numbers though of what these investors, we were doing loans to investors who are buying fix and flips. And I was like, I can't swing a hammer, Darin. I need YouTube to fix stuff around the house and Jennifer can do that better than I can. But I saw the numbers and I saw what people were doing and I was like, I'm clearly not paying enough attention to stuff that can really move the needle here.

Flash forward 18 months later, I had read 24 books. I had listened to over 400 podcasts, much like the one you're doing here with this is quality education, meaningful experience from people who have gone through it. And I did not need to read 24 books. I do not recommend anyone read 24 books if they want to go take this seriously, passive or active. You don't need to read that much. I was procrastinating after a point.

First Investments That Pay Monthly Is Scary

Darin: Well, I think it's scary. You talked about the three phases you've gone through and talked about getting into single family. I'm 52. I got involved when I was 47, 5 years ago and I had the capital. But I was still scared buying that first duplex because it was something I hadn't done before. It was an unknown. I also think that mindset plays into it. It wasn't until I got around a lot of other people that were buying these large deals that I was like, if they could do it, I could do it.

But everybody that I've talked to, even the ones that have 3,000, 5,000, 10,000 units, they talk about that first deal, whether it was a single family, a duplex, a first syndication, whatever it is, people were scared. Now, they're buying $30 million, $50 million deals and they're not scared anymore. But it's like anything in life the first time you do, it's scary.

Spencer: Absolutely terrifying, just to validate that. That is a comfort zone. I got to give credit to whoever said this many years before I did, someone much smarter than me. We all bump up against our current comfort zone when we try new things, we learn new things, we talk to a person we've never met before. We try something and fail at it, moving forward, failing forward. But once that expands and you do try that new thing, there's really no going back. That's a good thing. Meaning, like you and I, we now are able to look at these big apartments and think about it in a more level-headed objective way.

From 100% To 0% Overnight

Spencer: Sure, I get excited about a great deal, but in the end, once it clicked for me, wait a sec, our rental that we own out in the Midwest where we lost a tenant and immediately went from 100% occupied to 0% occupied overnight wiped the profits for the whole darn year in that one moment.

Same thing happens to a 400-unit apartment building sitting in Dallas, Texas, there's still 399 other people paying the rent. That was just like, it blew my mind.

Darin: It's true.

Spencer: It really does. It blew my mind. I was an operations guy largely in my career, Darin, just to mention this. I could understand a spreadsheet and I know you came from a deep business background, and business was a language I could speak. Same with my co-founder and better half, Jennifer. You just had to get over that idea and that stigma that we learned from the dinner table as I think most people do. Which is they have an uncle or an aunt or a grandpa or whoever who says, "Oh, don't get into real estate, you're going to lose your shirt." That's not a rational business-minded way to think about much of anything, certainly when it comes to going out and enterprising or building a business or investing.

Darin: Absolutely. Going through the pandemic, that scared the heck out of me being relatively new in the industry, and then all of a sudden you're seeing the news and people are saying don't pay your rent.

Multifamily Investments That Pay Monthly Continue Earning During COVID

Darin: You're like, "Well, I still got to pay the mortgage on this big property and how am I going to do that?" But what was interesting was like you said before. We had some people that, our delinquency went up for sure, but we were cashflow positive every month. Then, when somebody would skip out in the middle of the night, maybe they just would move in with relatives or whatever, they'd take off. We had a line of people ready to move in and that was like, I don't know, it gave me a ton of comfort. Like, hey, nobody ever could have planned for this pandemic and we're still able to make it work cashflow wise.

Spencer: 100%.

Darin: It's crazy.

Spencer: And headwinds come. In a moment, maybe we get there on the current economy in 2023, but I would say that that's the part of the core thesis that also drew me to this asset class at large, the bigger properties. But specifically in the ones that I like. I'm not myopic as an investor. I think it's so important, just want to add this disclaimer for folks about how I think about this stuff is the word and instead of the word or is core to how I look at my own investing thesis and our own investing thesis.

Darin: What do you mean by that?

Spencer: Meaning, you got to watch out for echo chambers, and if I go out and I read a blog or I see a person put out a really good piece of content and somehow they get to the conclusion of, oh, this person should only ever go invest in crypto.

It’s Not an OR, It’s an AND

Spencer: Well, then, I'm just basically going to say, "Don't think that that's a credible source." I would say the same thing for any asset class, because in the end, no matter how much I love multifamily, we don't put 100% of our wealth into it. We do put, on a personal level, our target mix is, the bulk of it is, but that's our personal choice, but it will never be 100%.

I think it's so key for anyone to take that into consideration is that it's not an or, it's an and. There is still an element of good, thoughtful, goal-oriented ways that we want to park our own personal capital as passive investors into things that make sense to achieve our goals.

Not to go too soapboxing on for folks, but I do think that that's an important piece right now more than ever as we talk about like yes, I love multifamily apartments and I love it for one of the many reasons that you just brought up, Darin, which is people need places to live. There's very little evidence to the contrary, data-wise, I'm speaking about the United States here, and that demand is expected to continue. Of course, you got to go quite a few layers deeper and that is what we do with data-driven analysis at looking at good deals.

But whether it's COVID, whether it's debt that just got money got way more expensive to borrow because of interest rates rising, there are ways to go and do this and invest our capital into these assets that can weather the headwinds. I love that about, that's why we put most of our personal capital into these types of deals.

Educate Yourself Before Diving Into Investments That Pay Monthly

Darin: I like that you explained that and versus or, and I think that's important for somebody new that's getting involved. When I got involved, buying that duplex was scary as heck, but it wasn't all. I was pulling out some of my capital from the stock market to invest in that one duplex. Then, I went looking for a way to go bigger, and then I started taking more capital out and reapplying it to real estate. But it wasn't like I had to pull everything out and just shove it all in, go all in. On another note, you mentioned crypto. I was like, am I just an old guy that doesn't know what's going on when it was running up. I'm like, well I got to start educating myself a little bit on this.

And so, I went and bought a couple of books and started reading on it and then started going the other way. But I was like, what if it does just go, and it's a huge investment? I needed to at least educate myself and take some action rather than just focus in my box solely. I like that and versus or thesis that you have.

You mentioned 2023 a number of times, talk about 2023, there's a lot of syndicators whether they're in multifamily or otherwise. If you're in floating rate debt, then your debt service is going up dramatically. Talk about 2023. What's your focus? How do you play 2023? Do you just stop investing or do you have some other play involved?

Spencer: I appreciate you taking us there, Darin. Right out the gates for context, a couple of things I'll put out in just bullet point form because these are my beliefs about how I look at investing.

There’s No Such Thing as Bad Assets

There’s No Such Thing as Bad Assets
Photographer: Justin Eisner | Source: Unsplash

Spencer: Always be investing, right out the gates. Just always be investing. What I mean by that is, and I didn't come up with this ethos, these are people far smarter than me who educated me through their content, their teachings, their actions. You model after success and you'll find these things out there. Read the tea leaves. One of the most helpful quotes for folks, it's been vital for me, but I'll share it with you guys. And I can't give credit because I don't know who said it, it's just so darn good, which is…

There's no such thing as bad assets. There's only bad prices.

You can apply that to a building that cost $40 million. You can apply that to the pen sitting on my desk. If someone really sits there and thinks about that phrase, apply that to any market context, because right now, we're clearly in a bear market. We're not in a bull market anymore. Is it a recession? Some people call it that. And some people call it far more dire. Some people call it far better than that. No one really knows what categorically to define the year 2023 quite yet, besides the fact that money costs more money, as you spoke to a moment ago, Darin. Meaning that interest rates are higher.

Where does that leave us? Well, this is kind of the big second bullet point I'll share. When I was working in tech, a key lesson I took away from working with people way smarter than me, that was one of the things I continually tried to seek out was learning even if it meant I would make less cash compensation at times and going into earlier and earlier stage tech companies.

For Investments That Pay Monthly to Work, It Comes Down to the WHO

Spencer: Because you get surrounded by some of these incredibly capable, incredibly intelligent, inspirational folks, way better. They were a lot more focused in college than I was, I'll just say it that way. A framework is what I took away from them, like a way to think about how do you go make great decisions about something. Well, usually, you have to take a lot of time, got to make them slowly. Can't really afford to do that sometimes in a startup in tech companies.

But you can go make a framework for anything. A framework can mean, well how do I make a decision on an investment like an apartment building? Should I pull the trigger in investing $50,000 or a $100,000 or $200,000 into this big apartment community? Well, Jennifer and I had to answer that question first for our own money a couple of years ago. In 2023, we applied that same top-line model. We just had to iterate on a few ways to adjust for the current context to get more conservative. But that really is all comes down to the who.

In the end, I didn't come up with the idea that there's three ways to de-risk a passive investment. Number one is who's going to be managing it? Then, you and I call that a sponsor or syndicator, operator, boots on the ground, asset manager. It could mean all the same darn thing. But really, the sponsor. Number two is where is it. Number three is the business plan. I didn't come up with that. Someone way smarter than me came up with that.

Now Is the Best Time to Make Investments That Pay Monthly

Spencer: The layer beneath it is something that we honed in and this is why it's so important right now to look at the who and who is managing a deal in the current context. Because regardless of how high interest rates go, a great and capable operator, that team is going to buy an asset, whether it's apartment building, a self-storage facility, a mobile home park, a data center, a warehouse, an industrial, whatever, we look at their track record, their approach, their team, their communications, and their values.

There's a bunch of bullets in a nerdy spreadsheet to back those up, but we don't have time or appetite probably to go into that level of nerdom. But I'll just say that taking the time on that is really the great equalizer. And so, we've invested in projects, we haven't had single dollar capital loss to date. I'm going to knock on every piece of wood in the house right now, not expecting to have any capital loss. But what changed in the market, just to say it bluntly is that assets are now going to be potentially at some meaningful discount. That's why I absolutely believe it's a great time to be investing. But I probably give the same answer that in 2022, was it a great time to be investing? Yes. 2020? Yes. 2019? Yes.

Darin: Probably for different reasons, right?

Spencer: Everyone out there, you'll always find people who say, "No, I'm sitting on the sidelines." It's like, cool, well, every person is allowed to do that. That's their choice. It's one of the most wonderful things about freedom. But I still think it's a great time to be investing assuming that you're taking the time on the who, if you're passive, for sure.

Consider Inflation When Running the Numbers

Darin: I've got another syndicator who's significantly wealthy, and he's like, "I've got some people that I remember 10, 12 years ago that were the market's too expensive, I'm waiting for a correction." He's like this, "Darin, they still haven't bought."

Spencer: No kidding.

Darin: When I got involved five years ago, I remember in Dallas, I came across people that were like, "Darin, man, I was buying at 30, 40 a door, and be like, I'm out." This was 2018. I'm like, "Well, I'm going to buy at 80 a door." It ran up to 150, and now we're in a correction and I've seen deals trade more like 120, 130, and this is the Dallas market, but it's interesting.

Spencer: 40 bucks a door sounds great.

Darin: Yes.

Spencer: 30 bucks a door sounds great.

Darin: It would be nice to go back to 30, 40 a door, and here's another thing, my son, he's going to be starting to work and he gets this offer and I'm like, "Wow, that's more than double what I made coming out of college." And so, he sent me a calculator and he is like, "Well, it's about the same when you factor in inflation." I didn't even ask him to do that or try to do that myself. I was just like, "Oh, that number looks pretty big compared to where I started." But that's interesting. It probably is never going to go back to 30, 40 a door. It could.

Spencer: Good for your son for running the numbers too.

The Third Piece to Consider When Diving Into Investments That Pay Monthly

Darin: In any event, one of the things you're going to do is, and I totally have the same mindset of the who. I kind of flip-flop the where first. Pick where you want to be, whether it's Texas or the Carolinas or Florida in some kind of growth market, and then find out the syndicators that are good in that market. It's pretty much the same thing. The business plan is the third piece. How do you explain this to new passives? Because I get a lot of deals that come through my desk from passive opportunities, and proforma returns are pretty much the same.

It used to be 7, 8%, maybe now it's somewhere between 5 and 8%, 5 and 7% cash on cash, and 80% to 120% total return on a five-year business plan. Everybody is getting, "Well, they all look good." Then, all of a sudden, one pops out and it's like 150% or 200% proforma return in the, oh, this deal looks really good. But you can make any deal look good on a spreadsheet. How do you differentiate those when they're all coming in kind of saying the same thing?

Spencer: Gosh, I don't know about you, Darin, this is one of my favorite nerdy topics, man.

Darin: Good. Well, I want to hear your answer because from my standpoint, I go back to that framework of where is it and who is it. And then I have some trust and the fact that they have a good track record. They have more data than I do, but I'd be interested in hearing your take on it.

What’s the Goal for the Money? To Put In Investments That Pay Monthly?

What’s the Goal for the Money? To Put In Investments That Pay Monthly?
Photographer: Alexander Grey | Source: Unsplash

Spencer: Some great lead on that, which is anyone could put together a spreadsheet, a good Google Slides, PowerPoint. The hard part is not coming up with what's a great looking IRR to slap on this slide to grab eyeballs, maybe put them on a paid ad on Facebook.

The real challenge for a passive investor, and this is where I think just as recently as yesterday, wonderful hour-long conversation I had with this couple based out of Georgia. If they hear this at some point, they're going to laugh probably. I won't mention their name, but they were brand new passive investors. They're doing the right steps, they're reading, they joined a mastermind group to learn from other passives, and they ask the exact same question, and they're staring at two different deals, nearly identical IRRs, same asset class. And I just shared my philosophy, which is I think they're jumping the gun.

This is where we all love and I'm so guilty of overcomplicating things. First layer, got to ask the question, what's the goal for the money? What's the goal for the money? We're all just so conditioned by many, many financial industry marketing tools predominantly around 401k marketing and stuff to just think, "Oh, we need a portfolio pie that's diversified." We kind of cruise by this key question, which is like what's the goal for the money? At a high level, that just means cash flow. Is someone investing in this thing because they want predictable, repeatable cash flow to hit a target income per month.

Darin: When you ask that question, you're asking for the specifics for that investor, what's the goal for the money that you are going to invest in this deal?

There’s Extra Work You Need to Do to Earn From Investments That Pay Monthly

Spencer: Correct. And it's the question I ask my myself, and thank you, I know we're changing fences here. If I'm a passive investor and I was asking the same passive investor, I said, "Guys, what's the goal for your money on these deals you're comparing?" The majority of the time, I don't know about you, Darin, but 99% plus at the time, folks say, "I don't know, I want a little bit of both. I want cash flow and the other thing is growth or appreciation." That is a fine answer because there is a degree of extra work that I don't think people have to go do. But I really recommend they do it, which is I took this step as a passive investor. This was way back in 2017.

Jennifer and I took a whole weekend. It was not an easy weekend. The kids stayed with someone else, and we had a planning session that was full of laughter, there was reconciliation, there was a fight or two. And we got down to some sticky notes on a whiteboard, as nerdy as it sounds to say, here's the dollar amount in passive monthly cash flow we want so that we don't have to be beholden to our jobs anymore.

I don't expect people to go through that. That was a hard weekend. On the other side of it is bliss and long-term prosperity, but that's a whole separate podcast. I just think that people are equipped to go and deploy capital without really knowing why they're doing it. Because you can find a deal with a beautiful IRR, but if you're a senior software engineer at Meta or Facebook.

Why Do You Want to Put Your Money on Investments That Pay Monthly

Spencer: We have quite a few of those in our passive investing group, and you're making $400,000 in W-2 income, it might make some people blush, but that's just some folks that invest in these deals. They say, "I want cash flow." I say, "Why?" Unless they want an off-ramp 5 to 10 to 15 years from now, well that's a good reason. But if they're just doing it and many of them love their work and they're making almost half a million dollars gross, why the heck do they need cash flow? They eventually get there, but no one has stopped to ask them the question. Sorry to go too philosophical on your question on this.

Darin: No, I like it. I like it and I think it's an important question to think about because there are some people that you talked about two different types of people. The scenario of all right, I need $10,000 a month of passive income, so I go leave my W-2 job. That's a goal. Cash flow is important. Then, the other goal is somebody like, "Look, I don't plan on leaving. I just want to put my money in something better than putting it all in stocks. Now, I want that to grow, so I want to put my money to work where it's going to have growth." Well, that's more appreciation. And so, to your point, why does that person care about the cash flow?

Spencer: Yes, nailed it.

Darin: I think that's coming at it from two different points.

Your Reasons Could Change on Why You Want to Put Your Money Into Investments That Pay Monthly

Spencer: Can I add one thing to it real quick, Darin? I want to make it clear for folks that there is no right answer to that question. In the end, it will change. Folks who start as cash flow investors and they want to achieve either financial independence or financial freedom, they will eventually become, if they follow that long enough, they hit their number. Jennifer and I were celebrating hitting our number a couple of years ago on passive, we don't sit on a beach. I know I run an investing club, I enjoy the work, I enjoy helping other people get to these things, but your goals change because a cashflow investor starts that way but eventually becomes growth-oriented.

There's other ways to goal set because people go straight to the asset and I love multifamily, you love multifamily. It's the core of our target mix in our portfolio, but frankly it's just the asset that produces the cash flow or the growth. The thing above that has to be defined first, which is what does the asset need to produce? And, if it has to produce a 2X, 3X, whatever equity multiple to grow your money more than the cash flow, you're going to want to know the answers to that, at least talk about it internally as a family before you even get there. Because I can show you two multifamily deals in the exact same market. You can grab these two.

You probably looked at them as recently as this or last week, Darin, and they look like they do the same thing. But that's where the real decisioning comes in beyond that to be like, "Cool." A class shares, B class shares, consistent rate of distribution, one says more growth.

Look at the Team’s Exit Strategy

Spencer: You got to look at is the team's exit strategy itself aligned to that too? Can they exit this thing. Which is really the only other point I wanted to make is regardless of how pretty the marketing deck is, does that team with the deal have a competency displayed in the past of selling to someone else at the back? Because if they haven't, just make note of that, because it goes into the risk profile of the deal.

Darin: Absolutely. Well, who is the seller? For some people, they don't understand what the exit strategy is and it's typically two exit strategies, either a cash-out refinance and return capital to investors, which is a non-taxable event, so that's very attractive if you can do that.

Spencer: Totally.

Darin: Because then- you're not paying any tax on it, or a sale. On the sale front, do people have track record of doing that? I think that people have different motives. Even people that I know well. And I see some people that may be wanting to build a portfolio of a lot of different apartment complexes so that they can sell one large portfolio to a large institution, and that might bring a better multiplier in the end. But if you are an investor in that first deal, you kind of want to know that because it's probably going to extend the timeframe that you're going to own that deal.

Spencer: Right.

The Velocity of Money

Darin: In a syndication, I guess this is where I've been to church and plenty of times where I'm in the seat and I'm like, I don't want to paint houses or clean up garbage, but these syndications I feel like are a way to give back and help other people to grow their wealth, but each of those investors have different needs for it.

Spencer: Totally.

Darin: I have one investor that we gave him a great return. He's like, "Darin, man, I want to invest but my kids are going to college now and I need the money for college." There's other people that, they invest and then they're putting it in retirement. There's other people that are investing and then they're buying a car or whatever. Everybody has different uses for that money, but I think that's key to understand from the syndicator also, do they look at each deal as when do they turn those deals, because that's the velocity of money.

Spencer: Oh man, it's such a great series of examples there.

Darin: How quickly are you going to get that money back so you can put into another deal? Talk about self-storage versus multifamily. I'm in one self-storage deal. I'm mostly in multifamily, one, because I know it, and two, because I've traded a lot of loan portfolios and I've had a lot of bank presidents and chief lending officers tell me how they love the performance of multifamily.

Self-Storage vs. Multifamily

Self-Storage vs. Multifamily
Photographer: Steve Johnson | Source: Unsplash

Darin: But I've also had self-storage units where I've kept for, I didn't mean to, I put stuff in there and then I was planning to take it out and I just didn't. Then, just right after month after month, it just sat in there where the amount of money I paid for that self-storage was probably more than what was in there.

Spencer: Which is frankly a very relatable common experience. We love our stuff.

Darin: It's hard to get rid of it. Talk about those two asset classes. What's your experience with self-storage versus multifamily?

Spencer: Yes, happy to. I think around 2019, we had already done more than a dozen large multifamily apartment deals. That means also sharing it with our passive investing club, Madison Investing. But then, I just noticed that I was like, cash flow, those were the first real signs that I saw where there was going to be a very meaningful, or at least a meaningful difference depending on, and this is not across the board, people love to run with generalizations, I do too.

But I wanted to find some good cash flow and a sister asset class that made sense to just meet our own cash flow targets as well as our clubs, because those are the three things that I look for still now is number one, cash flow in year one from a passive investment. Number two, looking for growth, appreciation, and number three, meaningful tax benefits.

I know all of that is very familiar stuff with your sphere of expertise there, Darin, but for most folks, that's really it, is those three things. In 2019, I was like, "Let's go and lean into the storage thing."

The Common Denominator Between Self-Storage and Multifamily as Investments That Pay Monthly

Spencer: We started to invest in it more. In the very state that you're sitting in now, still my favorite market in all the whole Sun Belt broadly, I think Texas is a great place for that. One thing right out the gates, just to say it, people don't live in the units, hopefully. Yet to date, we haven't had a facility we've invested in or have partnered with someone's living in there that we're aware of.

But I would say that there's a lot of similarities, I want to talk briefly about the similarities. Here's the similarities, which is they're cash flowing assets and really for real estate, I think if there's two big buckets to approach real estate, you can buy it or you can build it. It's kind of a duh. I've always leaned towards buying it because it's just a business.

If it's a storage facility, it's an apartment building, data center, whatever, you're buying this thing, you're going to do a value add plan on it. It could be light, could be heavy, really just means improve operations and do renovations. That's about it. Then, you're going to increase the net operating income and hopefully sell that thing or a variety of exit strategies from there.

Storage is one of those things where, as opposed to just core demand for apartments, people need places to live and that ain't changing. These markets need places, and people also need places to store their stuff while they live in those places, so that was one of those correlations, but also just tops down, not to go too macro and too financially focused too fast here.

The Advantage of Self-Storage as Investments That Pay Monthly

Spencer: There is an immense appetite from very large sources of wealth to keep buying storage, because it is boring, and in 2019, most people still thought, "I think it was super boring." By most people, I mean the retail investor, the average per human being, accredited investors, et cetera. People thought it was too boring.

Again, I got to tell you right about now, the market is speaking very differently. The boring looks real damn sexy in 2023. I'm happy that we bet right on that asset class move because right now it's just increasingly hot and looked very favorably. You could still get debt on it in good ways, it's more expensive. But all that to say, there's this notion of consolidation.

It's like the last comment I'll make on it, which is great example you gave a moment ago, Darin, on apartments and why investors should think about, hey, if I'm an LP, if I'm a passive investor, I buy an apartment building, I want to know upfront ideally if this apartment is going to be part of a big portfolio sale. If this syndicator wants to sell 20 properties or 10 properties to a Blackstone in three to five years. Because that might impact my investment. I'm going into storage assuming that's the case because they cost a lot less than a $40 million apartment. You can't go find $80 million storage facilities very easily. They're a lot cheaper typically. You could buy it. Now, it's really competitive, easier to build it than an apartment community.

There is Consistent Demand for Both Multifamily and Self-Storage

Spencer: Because of that demand tops down, a lot of really big, whether it's sovereign wealth, institutional wealth, they want in on a boring asset class that's predictable and easily packaged into buying mom and pop facilities, building new ones, putting them under one marque brand. They come in, they buy it, they're happy with an asset class. The investors that came in, the little guy, meaning like you and I, just individual investors, we can go in and participate in that ride. I just see that dynamic playing out with more velocity now than I did even in 2019. I don't know if that made any sense.

Darin: No, it did. A couple of follow-up questions on it. One, going into a recession, what happens with both multifamily and self-storage? In my mind, they're both still pretty resilient, because if people lose their job, they're probably going to sell their house and they're going to have to rent. That's additional people that are going to be looking at multifamily. If you lose your job in a high-cost market like California or New York or Chicago, you're probably going to move to a cheaper area that has good jobs available. That puts additional pressure potentially. In addition, I'm thinking, well, if you're selling your house, you probably don't want to part with all your stuff. You're thinking it's temporary, so you're going to move stuff into storage, and then move into the apartment.

Spencer: Totally.

Darin: Do you see that?

Spencer: You're nailing it.

Darin: I just want to get your take because I haven't owned self-storage through a downturn.

People Are Trimming Expenses

Spencer: I think that you nailed a couple of the use cases, which is that as much as we all like to think that we, meaning the consumer or the tenant in either apartment or a renter or a tenant in a storage facility, when we go through right now, people are broadly trimming expenses in life. Not just how we store stuff and where we live, but people are trimming expenses. We just went through a couple of months ago, we're like, "We're due for going through our streaming services." I think Netflix and Amazon should cover us. We were very overdue for trimming a few things just because it's good housekeeping, not really something you see happening broadly at the storage facilities, at least the ones that we're partnered on.

Also, the way that you can determine demand in a given market for a storage facility, you still can go, and just take a look at occupancy rates, similar metrics, some of them with their sister asset classes, I like to think of for apartment buildings. If the occupancy rates for a facility before you buy it are high and they have outdated systems, they're bloated meaning they're running too high on expenses because they do things in some old school ways, haven't used modern technology. They're not using basic technology things such as text messaging to tenants that forget to pay the bill monthly. They just needed a reminder. These are simple things to ensure the facility is full and they are still, if you could find the store facility that's still full with zero marketing, well that's a pretty helpful proof point.

Self-Storage Is a Great Option for Investments That Pay Monthly

Spencer: And so, that's kind of the play. Now, the challenge is, of course, everyone's kind of onto that now. A lot of folks are very in on that. There's a great, not that long, but 10 to 20 firms out there that are just hustling hard to go out and buy these facilities as fast as possible, fixing them up, improving them. Investors can come along for the ride, but deal flow is slowed down just like it has for apartments.

And so, now, the real challenge is who can go and buy it and then also probably build it efficiently and reliably without just stumbling their way into becoming a developer. Because value add is a lot different than building something fresh. And so, the firms that are trying to figure that out are really going to be going gangbusters.

Darin: That's interesting. I had somebody that was really strong. He was in a company that they do a lot of industrial. But he was like, "Well, I like the multifamily space better because in an inflationary environment, your leases are rolling over every year so you can adjust to the market based on wherever rents are." Well, self-storage, you could buy self-storage and increase the rents by $5 or $10 per unit in day one if you wanted to. I would think that that's even more inflationary strong from the standpoint of you can adjust to where the market is. Do you see that in the self-storage area?

Spencer: We do. I would say that not just within, I know we talked about Texas, but we work with a few different teams in storage across probably about 15 states, and over time, and just generally the answer would be yes.

The Pros and Cons of Self-Storage

The Pros and Cons of Self-Storage
Photographer: Álvaro Ibáñez | Source: Unsplash

Spencer: Because it's not as cumbersome because there's no people living in the units. One other thing I would say that was just noteworthy is you could think of two buckets for storage without going too deep into it more than you want to, Darin, you usually have climate controlled and then you have non-climate controlled.

Climate controlled, meaning literally it is what it sounds like, you got to put a little bit more infrastructure in there to ensure that they are insulated. They have climate controls, pumping air, certain ways to keep them in certain temperature, et cetera, for different quality items. When you're looking at these different facilities, those are the considerations that people can make. But you're going to have to remind me, it might've been Q1 of 2021, might've been 2020. When was the big Texas deep freeze, the first big bad one?

Darin: I think it was '21, but I could be wrong. I think it was not 2022, it was the year before.

Spencer: I think you're right. I bring that up because bulk of our portfolio was and still is multifamily, but we're starting to grow more storage and my heart went out to all of our friends and partners going through that in Texas because that was a rough time.

And I bring it up because I remember I had to fly out to Texas to do some due diligence for at least 13 different large apartment communities and probably a cumulative 70 to 80 burst water pipes. Insurance covered 100% of that, and some of those deals already exited to great accolades and happiness for all parties. Nonetheless, there's no pipes to be burst in a non-climate controlled storage facility. There's pros and cons.

Is Office or Hospitality Good Investments That Pay Monthly?

Darin: Absolutely. You always hear in the investing world, invest when there's blood in the streets. Have you done anything in retail office, some of these other niches within real estate that have been punished due to COVID and now people not wanting to go back to work. Well, they're going back to work, but then they want to work from home rather than go to the office. I guess a couple of questions there. One, are you looking to get into any of these other asset classes, whether it be office, retail, hospitality, because valuations have come down, and then two, do you see a repurposing of some of those assets?

Spencer: Oh, brother, that is an exciting topic. To answer your question first, we don't plan on necessarily going and buying retail for retail purposes, office for office purposes, et cetera. I have learned enough times at this point, and I sometimes step outside my lane and I get figuratively slapped for it when I do, I got to stick to what I know well. That tends to serve me well in all aspects of life, whether it's parenting, marriage, friends, business, and otherwise.

But when it comes to asset classes, I see a very good opportunity. That's probably understating it, a massive opportunity for conversion. I tend to just be upfront about the things that I don't have an answer to. This is one of those moments where I don't have an answer to yet how or who is going to crack that code. But I hear a remarkable number of people talking like they have, and I don't believe them, because it's freaking hard.

Turning an Office Building Into Multifamily

Darin: It's hard. I'm a passive in a deal that I got into maybe a year and a half ago, two years ago that was an office building in Atlanta that is going to be repurposed for multifamily.

Spencer: There we go.

Darin: I invested for a couple of reasons. One, I want to make a good return, but two, I wanted to see somebody else do it.

Spencer: Yes, me too.

Darin: Can they do it cost-effectively and profitably? Because if they do, then I think there's a massive opportunity across the country to take, and from what I'm seeing in reading, it's not the brand new office buildings with the high-tech and the great areas, it's the older office buildings that they could still be in good areas, but they're not up to the latest technology. Those are the buildings that seem to be losing tenants and not able to attract them anymore. Time will tell, but I was just interested to see, and maybe we just keep tabs and see where that goes.

Spencer: Would love to share notes on that in the coming months as well, Darin. I did want to just highlight briefly that looking at a dynamic that was covered at, I was speaking at a conference in Salt Lake City at the Best Ever Conference a few months ago. Incredible talk, he always gives an incredible talk. He was John Chang from Marcus & Millichap, and he was going asset class by asset class, also talking about what he sees on the horizon for supply chain distribution or disruption and the corrections in it, everything to what are the implications for office.

The Opportunity in Office Buildings as Investments That Pay Monthly

Spencer: I think the blood on the streets is very apparent, as you said earlier, but there's also some nuance in there, which was that take out all of the debt issues that have been occurring. This is me just paraphrasing my interpretation of someone else much smarter than mine, actual data-driven analysis that he did. Please go get his report. But my conclusion was like, oh, he said that already from pandemic through now, we all know people have been working remote more. You mentioned this earlier.

So, office was already lower occupancy in urban core, big city, primary cities, secondary cities, but big downtown areas, that was on the decline before debt issues. Where are people going and how is that changing? That brings me all the way back to just at least something that you made me think of, which is noteworthy for folks out there. I think this relates back to conversions for sure, whether it's using office building, smaller office building, not in a downtown area, in the suburban outskirts. Those are not necessarily declining the same way.

Companies are choosing to go outside the urban core. They're choosing to go in deeper into the outside sprawl of cities for lower rise, but there's still opportunity in buildings like that. There's still opportunity not just to use those as office buildings, but for other types of retail, other types of office. I don't want to bridge too broadly beyond it, but I look at it like, those dynamics on remote to work were already changing and office buildings are not necessarily ever going to be the same, in my opinion, for downtown. But there's big opportunity, whether it's outright use or just conversion in the sprawl around suburbia.

What’s Next for Spencer Hilligoss

Darin: That's a great point. I had people that told me, so in the sprawl during the pandemic, and I don't know if it's changed now, but restaurants that maybe were not doing so well during the week because everybody was traveling into the office buildings area, all of a sudden, they're full all during the week.

Their business actually did better because people have started to move out. I think that that same idea applies to smaller office buildings out in those more outward markets. That's a great point. I like that. Where do you go from here? You said you guys have already hit your number, but you love what you do. You're a young guy. Where do you go from here? What's your next big goals that you're setting for yourself?

Spencer: Yes, well, thank you. There's a little gray in there, I'm turning 40 in a month or two.

Darin: Well, my kids tell me my hair is white, so they don't even say gray. They say white. You still got some time, my friend.

Spencer: I appreciate you saying it. My five-year-old calls me squishy dada, and I'm like, man, I'm running a half marathon in five weeks, calling me squishy dada. What do I have to do over here?

Darin: That's great.

Spencer: That's what they're there for, to remind us. I think that one of the learnings, this is something I've been talking to a few passive investors about quite a bit recently, and just folks that I respect in my network, which is like what's on the actual other side of financial freedom, because I think that sounds perhaps to some people that is delusional/entitled/jaded and to all that and say a very self-aware comment when I'm making this comment.

Lifestyle by Design

Spencer: I hope everyone gets the chance to ask this question at some point in their life through their own hard work or otherwise, but it gets boring on a beach, man. I think that people are at their best, I'm at my best when I have challenges in front of me. It just means that now we all have to go choose a challenge that we deem worthy for ourselves. I've never wavered in my interest in helping other people get to this point who are in it like I was at the time in my career and otherwise. But also just trying to live whatever it means to live your best life as a father.

You could teach me endless lessons, I'm sure, at this point, Darin, I'm still early in that journey, but we're going to go live in Portugal for six weeks with our kids on a half-day education/we're still living and working there. It doesn't mean we're going to sit around the whole time, but it's not a vacation. I think we've been telling friends about that now as an example, but when people say lifestyle by design, it's not going to be easy to travel with a nine and-five-year old kid. Can't slap them on iPads all day and just say, "Go figure it out."

It's taking on that challenge on the family front and looking that as a stepping stone to go carve out what is a bigger version of life and more worldview for our boys. Beyond that, though, I think bigger education, more available for investors, but also just, I don't do a coaching program.

Serve Other People by Making Investments That Pay Monthly

Spencer: But I do want to be able to add some educational value beyond purely just the investing stuff. We'll see. I'm working on some stuff for just educational content platform to see how I can add some value that way for folks.

Darin: That's awesome. I think that that is, when you were talking about in the beginning, the three phases, maybe I add a fourth to that, is that most people that get into this, they start with the number or the goal or whatever it is to grow their wealth to a certain point. To grow their cashflow to a certain point. But then, it shifts, it morphs to your network starts asking you, "I'd just do it, man, show me, tell me."

Spencer: That's right.

Darin: Then, it starts to be like, okay, well I still want to have these challenges and I still want to grow my wealth, but I also want to help other people do what I did. I think that if you talk to a first-time passive investor right now, they can't see that. But after they do their third or fourth deal, all of a sudden they've got people in their network that are asking them, "How do you do it?" That's what's so fantastic is that you get that opportunity to help other people.

Like I said, was talking about before with the church, for me, I just am not wired to say I want to go off pick up garbage along the side of the road, but it charges me up when somebody says, "Darin, thank you for introducing me to this opportunity."

Blueprint for Passive Investors

Darin: All of a sudden, you see great returns for not only you but the other people that came alongside. That's huge. I'm glad that you are not spending all your time on the beach. I'm sure you spend some time on the beach. The wife probably likes the beach a little bit.

Spencer: Portugal's got some great beaches.

Darin: There you go. Hey, if people want to reach out to you, get to know more about your company, Madison Investing, what's the best way for them to do that?

Spencer: Folks can find us at madisoninvesting.com. We also recently launched a free guide, passive investor guide. It's called the Blueprint for Passive Investors, just a seven step guide. It's for free on our website, but folks can go there or connect with me on LinkedIn and get more active on there again. Happy to be a sounding board or just a resource for folks.

Darin: Look, that's huge. If you're a new passive investor, I didn't have a seven-step guide. These are all ways that you can learn from other people that have been through it. Check out his website, check out the seven-step guide, reach out to Spencer, good guy, and a lot of experience. Looking forward to meeting you in person at some point. Definitely look me up if you're in Dallas and appreciate you coming on the show. Live with that.

Spencer: Thank you, Darin.

Darin: Yes, absolutely. Listeners, I hope that you enjoyed that one until next week, signing off.

How To Reach Spencer Hilligoss

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Darin Batchelder

Wealth creation through real estate provided me with a new passion to get the word out and let others know that they have an alternative to investing in the stock market.

If I can inspire and educate just one person to take action that results in life changing wealth creation then the work to launch and grow this podcast is well worth the effort.

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