Business Insider: A Silicon Valley tech leader left behind a lucrative career to pursue real-estate.
Christopher Competiello Jan 7, 2020, 5:11 AM
Spencer Hilligoss, the cofounder of Madison Investing, took anything but the conventional path to real-estate investing.
He quickly learned that real-estate syndication was the strategy that most aligned with his goals of passive income and stable cash flow. To him, bigger means better.
Before making an investment, Hilligoss vigorously vets three criteria that he lays out in detail below.
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Spencer Hilligoss, the cofounder of Madison Investing, carved his way into the real-estate investing arena on a road less traveled.
In fact, for 13 years, Hilligoss spent the majority of his time building teams for technology companies with unicorn aspirations — not sniffing out real-estate deals.
But eventually, the Silicon Valley work-until-you-drop mantra started to wear on him, and he began searching for an alternative path to financial freedom. He sought one that wouldn't require the grueling hours and the nonstop nature of a tech startup.
"Something's got to give," he said in an exclusive interview with Business Insider. "We can't keep pushing this way — both my wife and I — working careers, raising kids, while working 60 to 80 hours per week."
Shortly thereafter, as fate would have it, one of Hilligoss' career mentors nudged him into a position at a real-estate-technology company.
"That was my introduction — personally — into real estate," he said. "I had to learn the ropes. And I had to learn them deeply." He added: "That led me to a ton of great resources. And just by building a program for others, I was really building a program for myself."
During this time, he listened to more than 400 podcasts, read 24 books, enrolled in real-estate-coaching programs, and scoured the internet for viable resources. Eventually, that led him to the methodology and strategy he employs today. It has since helped him achieve over $350 million worth of transactions and get a piece of over 3,500 units — and it's known as real-estate syndication.
For the uninitiated, real-estate syndication equates to crowdfunding for institutional-quality deals.
Hilligoss realized that when it came to real-estate investing, the more units, the better. He had studied the devastating impacts the Financial Crisis had on single-family-home default rates and knew the investment risks were steep and deeply embedded within those properties.
To him, more units translated to less risk.
He provided the following example: If a tenant in a single-family property stops paying, your cash flow is zero. However, in a multifamily property, if one tenant stops paying, the impact to cash flow is much less severe.
"I call that significantly more predictable and stable," he said. "It creates insulation around that kind of volatility."
Hilligoss' dealmaking strategy
In Hilligoss' mind, it all comes down to three things: analyzing the operator, the market, and the deal itself.
But before we dive into specifics, it's important to note what the main goal of the strategy is: maximize cash flow.
"That's the money that is coming in net after everything else is taken out," he said. "That's what we're doing all this for: cash flow."
In real-estate syndication, the operators — or general partner or syndicator, as they're commonly referred to — are the people in charge of pulling together a large group of investors for a deal.
"An excellent operator can still produce predictable stable projects and income in a mediocre market," Hilligoss said. "But not the inverse."
For this reason, Hilligoss says vetting the operator is the first thing an investor should do before anything else. Without proper leadership and a proven history of success, he's not biting.
"You have to go and figure out the background of these people you're about to put your capital with," he said. "Have they done this before?"
"Real estate is truly a hyperlocal business," he said in a prior interview on the "Millennial Investing" podcast. "There's so much media noise right now about where we are in the economic cycle."
To Hilligoss, this means that investors can't paint all real-estate geography with the same broad brush. There's always an opportunity somewhere, and every location is unique.
He recommends analyzing the data available at city-data.com. Investments can be vetted for population growth, income growth, job growth, rent growth, home values, and crime statistics on the website.
Neal Bawa, the CEO of Grocapitus and MultifamilyU, advocates for a similar approach.
Ideally, Hilligoss says you'll go into a potential deal with a certain set of criteria already established. This will help an investor stay on track when the emotional aspects of a deal start to take hold. Without a plan in place, an investor is directionless and susceptible to misjudgments.
Hilligoss recommends having an annualized-rate-of-return figure to try for before. He personally looks for 8% annualized returns with the end goal being a sale of the actual property.
When all is said and done, he hopes that the 8% annualized returns coupled with the sale of the property will result in an 18% return.
"You can't treat this as a hobby," he said. "If you go in thinking this is going to be as light as investing in a 401(k), then you're in for a rude awakening."