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Podcast: Apartment Building Investing with Michael Blank

MB 186: The Predictability of Passive Investing in Multifamily – With Spencer Hilligoss

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Intro: [00:00:00] Capitalize on the stock market downturn now and build your wealth through real estate investing. Join Michael Blank along with hundreds of other savvy investors at Deal Maker Live, the number one multifamily event in Dallas, Texas from June 1st through the third. Gain exclusive access to strategies used by over 10,000 successful students to acquire over $1.5 billion in real estate assets. Register now at deal maker live for a huge discount and secure your seat. Tickets are going fast. Don't miss out on the opportunity to transform your financial future. Go to deal maker live today. This is the apartment building investing podcast with Michael Blank. Episode 186. Let's do this. You're listening to the Apartment Building Investing podcast where we'll talk about all aspects of buying apartment buildings with a special focus on raising money from others. And now your host Michael Blank.

Michael: [00:01:02] Hey, hey, hey. And welcome to the show. I am your host, Michael Blank. We're going to learn all about investing in apartment buildings, the most direct route to financial freedom. And I realized a about a year ago that at financial freedom with real estate is possible for anyone who wants to be the real estate investing entrepreneur. The active investors. We talk a lot about this on the on the show, but I realized recently that the passive investor, the ones that we syndicators raise money from, literally want the same exact thing. They want financial freedom. Now, a lot of them maybe don't start out that way, just like the active investor doesn't start out with, I'm going to quit my job by investing in this real estate. They think about, hey, establishing another income stream. So if something were to happen, job loss or recession or illness, they have another income stream. That's typically how it starts off. But the passive investor thinks exactly the same way. The only difference between an active and a passive investor is that the passive investor has some amount of money to invest, and the active investor, while they do, don't have nearly as much. They were. Opportunity exists for both of them, but specifically for the past investors and we're talking to you right now. If you are the active investor, this episode is going to be super interesting for you because you're going to be listening to a passive investor and they're going to talk about when I say they, it's going to be Spence Hilligoss is on the show today exactly what he looks for when he invests in a deal. What does he look for in a sponsor? What does he look for in a market? What does he look for in a deal? And so understanding that as an active investor is super important as you go out in the world and try to raise money. He also talks about, hey, if you're a newbie, you don't have a track record, what can you do to induce him to invest with you? Super information. Now for the passive side. It's obviously super interesting because Spence is one of you guys or gals, right? You have some money to invest and how do you do that? How do you wrap your head around it? How do you evaluate different investment? How do you how do you remove assets from the stock market? And he talks about all those things. He also talks about that he realized he could use this as a vehicle for quitting his job. And he's literally right now in a position to quit his job. He's not quitting it for six months. He's got golden handcuffs on. But but he's got the income right now. And in fact, he talks about how he came about with he and his wife, how they project financial goals, How much money would you have to invest with, what kind of assumptions to get X amount of dollars per month. He literally walks through that in this episode and it's super systematic, analytical guy. He's engineer like like me, I guess. But it's super interesting and super easy to follow. So he goes through all of that thing. So let's get right into the show here with Spence Hillegass. Spence, welcome to the show. Thanks so much, Mike.

Spencer: [00:03:37] I'm excited to be here.

Michael: [00:03:38] Well, no, I'm excited because you're basically ready to quit your job right now. And you did it all with passive investing. And this is a whole new thing for us in our audience because I talk a lot about financial freedom by becoming a syndicator which is active investing, and that certainly is valid. But I've had now several people on the show who've accomplished exactly the same thing on the passive side. And what I've concluded, of course, is that the passive investor wants the same thing that the active investor wants. They want financial freedom, they want to control their time. They want options. So you're just about ready to quit your job. And you just told me that you're going to wait another six months or so. Why not just quit it right now?

Spencer: [00:04:13] Yeah, that's the million dollar question, right? Michael? Frankly, there's two things that keep me at the job right now. The people first and foremost, you know, I manage a group. I care about the people that I work with, and I want them to succeed. I want them to feel like they're in great places and in great hands. So that is unabashedly number one. I got to take care of my people. And probably number two would just be one of the things I've heard now from actually some of the top, you know, real estate professionals that are out there, people that kind of look at as heroes, including yourself would say, in terms of transitioning from full time W-2 employee to quitting, is they pull the ripcord a little too early if they could go back in time. And what I look at as that last. You know, maybe six months, 12 months. As you gear up, you're ramping up your investing passively or maybe you're doing active stuff. I looked at those numbers and I thought, let's just stay focused. Let's balance it and let's phase down the W2, ramp up the passive investing and the real estate work, and then let's do it a little bit more of a soft landing as opposed to just saying, let's go all in, let's, you know, pull the ripcord and just and take the leap. I'm all about, you know, going all in and burning the boats, as we all talk about. But I figured, why not just try to phase this out a little bit longer?

Michael: [00:05:30] So you're scared?

Spencer: [00:05:32] Exactly right. Yeah.

Michael: [00:05:35] You know, from my own experience, I mean, going from a job to to not I mean, that that was, like, unbelievably difficult for me. It's because you're seasoned to have a certain amount of stability and you kind of take it for granted. And now you're like, Well, I'm now going to ruin my stability.

Spencer: [00:05:51] Right. Well, and you work so hard for so long just to get to this point of, you know, you climb the ladder and you get promotions and you think, wow, this new VP title or this new whatever director title, that's going to be the point where I'm finally going to feel like I'm in control of my financial destiny. I can take care of my family. I can take care of people I care about, but it's just not the way it works out in life these days. And so I think once I hit that realization, it was like, wait, I've got to go look beyond this ladder. It's not a ladder, right? It's actually a matrix. It's a bunch of different opportunities and you have to go carve your way through it.

Michael: [00:06:23] So let's let's rewind the clock a little bit here. So you're in a good spot. You're going to have some options here shortly, which is great. But how did you get started in real estate investing?

Spencer: [00:06:31] Yeah, I appreciate you asking, you know? So for me, you know, I found passive investing in particular through a journey that was really one of hardship and hard work and good timing. You know, my own investing strategy, as you mentioned earlier, Michael, has been focused on passive investing in multifamily real estate, but in specifically in syndications. But it didn't start out that way. So my first exposure to real estate actually came when I was just six years old, believe it or not. I was watching my dad grind it out as a broker at residential real estate broker in the 90 seconds, and he was a top performing, you know, nationally real estate broker. And so as a teenager, he made me work open houses as like a 15 year old. And he had me meeting with prospective buyers, like actually touring like $10 million mansions, you know, And so these are affluent prospective buyers. And, and it wasn't easy acting interested in that. That was really hard. Frankly. It scared the bejesus out of me. And I didn't really want to go do real estate at all after that. But that time of life was my first exposure to real estate, and I bring it up because it was generally a good time of life for us until I had a pretty rough set of experiences along with my family. And that drove me in many ways to where I am now. So that was the time when we entered this period of what we call the dark decade in my family. And unfortunately, because my younger brother Justin, he was diagnosed with pediatric cancer, you know, he lived a very beautiful brief life. And shortly after that, you know, some tough stuff happened. My parents got divorced, as is quite common in those scenarios and the financial fallout from all these different compounded things of that dark decade. It resulted in watching my family and me as a part of it go through bankruptcy and a major downsizing of my family. And so, you know, watching all of that, it had a profound impact on me and on my worldview. And it really brought me to come to this belief that, like, what can I do now to play defense better financially, you know, because I have my own kids now, right now I'm the dad. I'm out there trying to to make my way in the world and provide for them. And I found myself from those events asking questions like like how can I avoid bankruptcy like that? How can I take lessons from that? How can I create a financial moat around my family? You know, like, how can I truly set them up in such a way where if something like job loss for me or terminal illness or debilitating injury or something crippling like that were to happen, how do I keep the lights on and how do I keep food on the table for them? And so, you know, long story short, watching that broker experience for my dad like it made it made me really feel like that's the most active type of active work. And there's so many roles out there, including W-2 work, like we were just chatting about a moment ago where you stop working, the income stops flowing, and that is something I became somewhat obsessed with now in my adult life. And it started all the way back then. And so financial defense is top of mind for me and thought there must be a better way. So flash forward, I'm I'm hearing this tech career. I work in Silicon Valley and been here in the Bay Area, California. I've now at a real estate tech company, five companies deep in this software journey, 13 years into a career. And I'm just watching this play out both from my own personal journey as a corporate employee, but also now having managed and hired so many people across these companies, I just wanted to share that this insight. This is how most tech startup company employees approach their wealth strategy, and it's four steps and it's really straightforward. And this is fascinating, which is. Step one join an early stage startup and hope that you get a meaningful piece of equity in that company. Step two work voraciously like work 24/7 nonstop. You know, you're working 16 hour days and can happy to go offline and talk more about that at some point if you'd like, because I did that and I've done that. Step three you pray that you get the one that you picked, like the one startup tech company that that is like the next Facebook or Google out of a thousand and maybe that startup happens to have like a liquidity event. And then step four, you're probably matching all of your expenses and your very expensive housing costs in the Bay Area or whatever other pricey market you're in. All of your life expenses and you're matching that income and maybe you have some additional savings that you put into a 401K, but most of the time you're not saving anything that can assist you in the short term. You usually have to wait till retirement to touch any of that stuff. So bring all that up because that was my playbook for the last ten years roughly.

Michael: [00:11:08] That was mine as well. I don't know if you know this, but I have a software background as well. In my situation, I got lucky. I was one of the one 1 in 1000 companies that actually went public back in 2000 and put a bunch of money in my pocket. Oh, yeah. Yeah, I was. I was. I was living exactly. That was exactly my strategy. And it worked for me. But when I read Rich Dad, Poor Dad in 2005 and I was about to go and essentially start my own software company, I realized the the low probability of that happening again. And that's that's why exactly why I shifted to something else. You talked about defensive that moat around your family. And that's exactly what I did. In my case, it was quite a bit misdirected because I went into restaurants. Okay, lost all my money story for another time. But in your case, so you're in this, you're in this environment. It's a fun environment. I do miss it every once in a while. It's a high paced environment. You are working your butt off the chance of actually it panning out in some kind of sale or is very low. So you're in this environment now and you're trying to figure out how to play, you know, financial defense. What do you decide to do?

Spencer: [00:12:10] Yeah, you know, so I feel very lucky to have stumbled into my current company where I'm still there. You know, obviously I'm planning on moving on and doing real estate full time. But it's a real estate company that focuses specifically on lending to real estate investors. So here I come after getting, you know, scared off from real estate by my dad's line of work as a kid, somehow full circle ending up back in the real estate world through a tech company lens. And I'm surrounded with flippers because that's the type of investor that we work with at this company. And I just get the bug, you know, I pick up Rich dad, Poor dad, you know that you just mentioned I read the Purple Book and then I read 23 other books and I just get the bug so bad I listen to your podcast amongst many others, 400 plus podcasts. I think over a course of two years I get coaching programs going, all these different things, and I compare these strategies that are out there, like flipping, wholesaling, being a broker, and I look at the asset types, you know, single family, small multifamily, large multi-family, all these different things and after doing all that, that diligence and that nerdy research, I realized like the way that I'm going to play off not just defense but offense, like I'd like to grab the reins and do something about this is I'm going to go with, if you use that the Kiyosaki language that think he even brings up in Rich dad Poor dad of the buckets versus the pipeline right It's been mentioned a thousand times but it man did it resonate with me where you can go and create these one time cash events like dumping the bucket on the table like a flipper or wholesaler or a broker. And that's a great way to build capital one time. But I want a pipeline like I want to build passive income streams that are going to flow for all those reasons we already talked about. And so that landed me on. I got to do passive income, but we didn't start with multifamily. We went out and started doing the build of residential portfolio playbook. We bought rentals. You know, we got up to about seven rentals before we realized the late night plumbing repair call was still something you have to deal with even when you have a property manager and like it blew our minds. Like we were sitting there going, everyone told us rentals are passive. And so we built that portfolio and we still couldn't get away from having to actually deal with the headaches. And so we also had some vacancies and like we watched the vacancy go from 100% to zero and all of a sudden all of the income from these things were gone. And so we dealt with that. It didn't leave a great taste in our mouth. We still have that that modest portfolio, but we also just looked up, we looked up market and we realized that if you go and focus on the bigger stuff. It's more stable. Your vacancy doesn't doesn't go up immediately to 100% when one person leaves because you have 100 units or 200 units or 400 units in a big apartment building. And that you've also just got more predictability and more tax efficiency and all those wonderful things that come along with multifamily when you go bigger. And and that's why we passive invest in those things now.

Michael: [00:15:04] Well, I agree with that. But but back to the you were buying single family. Were you landlording yourself or were these turnkeys or what kind of single family investing was this?

Spencer: [00:15:13] Yeah. So we we first bought locally. We kind of we went through the series of steps that is almost so logical, so predictable.

Michael: [00:15:21] Spence That's so predictable.

Spencer: [00:15:23] It's we went local because we weren't quite comfortable yet, quote unquote, going out of state and buying sight unseen. So we drove around for a whole year locally to find some kind of cash flow in this California market, which, by the way, is just not not worth it. It's just totally not worth it. Happy to talk offline if people ever want advice on that one. But we did buy a duplex and it's cash flowing. It's $430,000 to eke out $250 a month in cash flow. Michael And that that number doesn't feel great. Of course it will appreciate. But we did that. Then we went to Turnkey. And we went turnkey bought in the Midwest.

Michael: [00:15:58] Yeah, that sounds good. A lot of people do that.

Spencer: [00:16:00] And it is stabilized now, but it wasn't at first. And so they have property managers on the turnkeys. I will say that there is more involved still in managing those those turnkeys than you would expect. And there are I'm very happy with the company that we went with, by the way, because it's turnkey. Turnkey has kind of a polarizing brand out there, it seems like, and probably for good reasons. But we feel lucky that we did find a turnkey company that treated us well, but the asset is not quite as passive as even on its best day as you would think. And so we still have to take that phone call.

Michael: [00:16:33] Yeah, I've heard the same same thing. A lot of people, like you said, is very, very similar path. They'll have a local, some local small rental. They go just kind of sucks. I'm going to go passive and then they go with turnkeys and they discover it's not so passive and you go through phases. And so you said, you said, okay, what else is there? And you discover multifamily.

Spencer: [00:16:51] You got it.

Michael: [00:16:52] Nailed it. Yeah. So what do you like about investing? How is that experience different than, say, turnkeys or your own houses?

Spencer: [00:16:59] Oh, my gosh. You know, when I compare it a little bit through the lens of kind of the tech career that I've had, I think about the rigor and the operations and the frameworks that you that I use in that career. And it's so much more akin to multifamily and passive investing in multifamily. What I mean by that is you can see everything on a beautiful spreadsheet. If you think spreadsheets are beautiful, you can find that in multifamily and so up front you just analyze the deal. You build the right relationships with the right people. You know, there's kind of a three, three, three ways to vet a deal. And that's, you know, the operator you're working with, the market that you're looking at in the deal itself. And once you get that framework built out and we've invested heavily to kind of dial that in for our purposes, even all the way back to the first one, we went and did a lot of diligence on that one. You can analyze it and you can really look at it and say, Oh, we believe that. We believe that over the next five years, for example, if we put in 50,000 bucks of our own capital into this investment and it's out in a place like Texas, then it's going to not only take that 50,000 bucks and pay us an income for five years at, you know, something reasonable and pretty tax efficient, it's then going to come back to us with predictability when they sell. And maybe if we're lucky, there's going to be a cash out refi along the way, but don't know anything else. I haven't personally found anything else where I can go and put my capital into something like that, effectively, have it double within a five year period and come back to me at way lower tax rates than I have ever seen in my W-2 career. I don't ever lift a finger when it comes to managing the passive investments in multifamily that we've invested in, which is still blowing my mind because it's in some cases less capital than we've put in, right? I mean, you can say that our previous investments in residential were just like learning, you know, you know, singles or doubles or whatever baseball analogies you want to use. But in passive investing in multifamily, we don't lift a finger besides that up front diligence, and then we just get updates from our sponsors and, and hopefully if you chose wisely and we'd like to think we did so far, the partners will send you a lot of detail. So they send us these reports and we get to see, Oh, cool, Looks like the occupancy is strong, looks like the rents are where people want them to be. And I'm glad to see that in direct deposit landed in our account the way it was supposed to. It's just it's like clockwork and I still scratch my head going, Man, why didn't, like, know about this 20 years earlier?

Michael: [00:19:28] Well, that's why you're on the show. That kind of changed that because it is the most amazing investment vehicle on the planet. The combination of cash flow, you don't get cash flow from stocks unless you're selling puts or calls like advanced stuff. No cash flow. You get consistent, predictable returns and you don't pay any taxes. There are very few taxes. It's it's mind boggling. And it's all because the IRS or government wants us to invest in real estate. That's what we think is important. So that's interesting. Now, so you've been through this a few times now and you kind of see what the effect of that is. To what degree does this allow you to do to do any kind of planning, financial planning, goal setting? Like, you know, we talk a lot about, you know, about this freedom number, you know, trying to covering your expenses. Can you talk about a little bit more of what in what to what degree you can provide some guidance around goals, financial goals that people passive investors can set?

Spencer: [00:20:16] Yeah. Can share what we do. Not to say it's perfect, but I feel like it's working out for us and it was not easy to get to it first. So a quick aside will be that my wife, Jennifer Morimoto, is not only my my partner in life and a fellow parent, but like she's also my business partner. And so we sit there and we analyze and decide on these deals and set goals together. And so up front, we spent probably 2 to 3 weekends at least having some real conversations about like, what did we want out of all this? Because in the end, before I go into the financial targets, I got to just add that like our big number here is not based on wanting to go buy a jet. I'm okay if people want to go do that. I mean, frankly, that's totally up to them. For us, we want to be great parents. We want to be present physically, parents whenever possible. We want to be able to give back charitably. These are all some of the reasons why we want to be able to get passive income. It's not because we want to live some huge life in a mansion and fly jets. We want to do. We want to live a good life, be a good parent and give back. So how do we do that? Now you're getting into the financial goals. And so we said by when do we need what dollar amount? And so I'm even willing to share like like an exact number. We said if we get to the point where we can say like 8000 bucks in a month eventually in passive income and we can get that flowing in monthly. And that number may tweak. May tweak up or down, right. Depending on our circumstances. But if we get that as our long term goal and we started that goal, Michael, as saying let's get there within 15 years, like way, way out there. And that's what we did, that sat there for a week and we decided it wasn't fast enough. And so we, you know, we've done more since then to figure out how we can compress that timetable down to more like 5 to 7 years. And we're on track for that number instead. But what we did was say. Let's assume that's your number. 8000 a month. Let's also make some assumptions about what we've seen on these deals we've invested in. So call it an 8% return on average before the properties are going to sell these multifamily properties you're putting in. We're putting in 50 K per deal. And every single year during a five year period, we're getting that 8% back. So it translates to something like 333 bucks a month. And this is all averages and speaking in our own experiences, of course. All we have to do is back those numbers into what how much capital we're going to have to put in and over what period of time. And assuming that that capital comes back, we're going to get that 50 K back at the end of the five years and be able to keep investing it. It starts to grow and it starts to compound and it starts to snowball. And it's a beautiful thing because, you know, within a matter of about five years, let's say we've done that, you know, ten, ten deals, let's say we've done ten deals at 50 K, we're looking at like 3000 plus bucks. Five years from now, we've got our money back. You can do it again, double it. And now we're looking at like an $80,000 a year passive income stream. That is amazing. And so we're able to get there over time. We're not in a rush. We're just trying to get there responsibly. And you can actually forecast this stuff in a spreadsheet, which I think a lot of times growing up and even in my college and early career years, real estate seems to have this bad rap of being unpredictable and risky. And I'm sure it can be those things. If you don't do diligence and you don't analyze and you don't put stuff down on paper and you don't vet your sponsors and your partners. But for us, so far it's been incredibly predictable, like like the best kind of boring. Yeah.

Michael: [00:23:55] I do like that about as well. You can literally create models that forecast with a fairly high degree of consistency. And if you look at the way that multifamily performed in a recession, the the problem is people think that all real estate is the same. So when when we are thinking real estate, we're thinking foreclosures, foreclosure, foreclosure. But that was single family houses. What are the other asset classes? How do they perform? And they perform markedly different than single family houses did, including multifamily. The foreclosure rate for multifamily was 0.4% versus houses was 4.5%. Order of magnitude different for multifamily. That's that's a lot. Now, maybe rent stayed flat and we're projecting maybe a 2 or 3% increase and they stayed flat and maybe vacancy went up a little bit. But you're still getting a check. You're not you're not getting 8 or 10%, but maybe you're still getting something less than that, far greater than the stock market. And and obviously real estate rebounded. So. Yes. Okay, maybe I don't get my money back in five years. Maybe it's seven years. But the stock market, it takes much longer to recover. So the the the predictability of that is is much, much higher. And that's one of the reasons we like that as well. So that's really fantastic. And like you said, a compounds at a 14% return the money doubles every five, four and a half years. So if that happens, even if you don't put any money in, that money is going to keep doubling every five years.

Michael: [00:25:10] Now you are putting money in because you're obviously earning earning money. But other things will accelerate also. For example, cash out refinance. Right? Maybe you've gone through that. You get it back sooner. And not only can you now reinvest your money in a new project, but you're still getting a return on the other money. So it's like you're using the same pot over and over and over again. So really love that. Now, one of the things you did said in the passing is once you find a good sponsor, things are great, right? And so right. So obviously it's a little bit like if you're an active syndicator, finding the right property manager is when your life is great and when you find a not so good property manager, your life is well, not so great. Takes up a lot of time. You know, I'd be curious to see how many sponsors that you're investing with. It may be a very small amount of people you're actually investing with. So talk about what do you look for in a sponsor and how many sponsors should someone invest with? Is this like a thing that's that takes a long time to find out. It sounds like it takes a lot of effort to find that person. Talk about the effort of finding that person and how many of those people you need to find.

Spencer: [00:26:12] Oh, yeah. It's a great question, Michael. I think we've invested in four sponsors on the first one. One of the principles that I take out of my start up career is that the first time you do most things, it feels like it takes forever because you're learning. And when I first started to look at, you know, with Jennifer, with my wife and business partner, we would look at this deal and we're learning the language. We're learning how to ask the right questions without sounding like total idiots. And we put together a framework and then we pressure tested that framework on how to make the right decisions and how to ask the right questions. And so the framework is is not revolutionary at the high level, and that is look at the operator, look at the market and look at the deal. But within the operator, the terminology really threw me off at first because operator can also mean sponsor. And a lot of folks that are first getting into this are going to be like, why do they keep using those terms interchangeably? It's because they're the same thing. Most of the time we look at track record. Approach. And we're definitely going to look at their team and their communications and within each of those, very specifically, to give you an example, under track record, that's not some buzzword we actually get really granular. And so we framework this out to the point where we look for a track record that has a proven playbook, and that means they've done this at least three times three past deals with the same asset class and the same operational plan. They've got a failure response, a proven example where at least one member of that team or that sponsor has has really missed hard in their entrepreneurship career. It doesn't necessarily always have to be.

Michael: [00:27:47] Like that a lot. That's interesting.

Spencer: [00:27:48] Well, they haven't. It's okay if they haven't done a capital call, you know, if they haven't done that specifically, but if they haven't taken a figurative kick to the teeth and we've all had them. But as an entrepreneur, if they haven't gone through that, then it's a major red flag to me. Because why is that? Because that's how they build the muscle memory on decisioning under duress. And I certainly don't want someone who's sitting there looking at the spreadsheet managing all of these limited partners, including my capital, and trying to decide if the project isn't going well, should I do the right thing and maybe recapitalize this project that I didn't set up correctly with my own capital? Or are we going to have to go do a capital call? You know, of course this is a very generic example, but but that that's one thing that I would say is critically important to me about the track record for someone is have they been through a hard time, like a really tough time entrepreneurially? I mean, another one would be trustworthiness as vetted by reference calls. So same thing if you're hiring for a senior leader in the corporate world or a tech company, you better believe they're going to have some people that are willing to vouch for them if they're if they're good and if they're trustworthy. And if you struggle to find one person or two people that are willing to vouch for them, you got to run because it's just not It's it tells you everything you really need to know. The success leaves clues thing applies here. But in this case, I want to talk to people that actually would be willing to vouch for them. A couple other things just to rattle them off skin in the game, meaning they invest in their own projects in a meaningful way. Project performance. They've actually accurately, reasonably forecasted that they've done this in the past and they can do it again. And then exits. Have they ever had a single exit? Whether that is a refi, hopefully if it's let's say it's a new sponsor team, a new GP team, maybe one of the members has had a successful exit or a couple successful exits. We at least want to see that because clearly there's there's new new teams formed every day. So just wanted to give some kind of granularity around that. So that's great.

Michael: [00:29:54] I think I think that's that's really great. Now, if I'm a newbie newbie syndicator, I'm doing my first deal. Obviously, I'm checking very few of those boxes. And it sounds like on the surface of it, you would not be investing in with someone who just found a great deal, you know, wherever it is. But they are not checking those boxes. So what is your advice to a newbie syndicator to try to get investments from more seasoned investors like you?

Spencer: [00:30:16] Yeah, you know, one of the things I have I have absolutely cherished and found critical for for educating myself on this journey has been partnering and coaching. And what I mean by that is you can find people out there who are very experienced and they've done deals, many of them, and they are willing to work with you if you are willing to work for them and add value in some way, shape or form. And so if you are out there and, you know, I've been talking to a handful of folks that have approached us recently asking, hey, we should partner on a deal. And I'm like, Well, cool. Have you ever connected with so-and-so? And I'll kind of point them in a direction of someone who I know is an established operator that is willing to work with people. They'd love to find a great deal too, so you can partner up with people, you can borrow that credibility. And I think that that has been critical in my own education journey. Just trying to understand at first, how do I approach people that have these amazing journeys and track records and basically say, I'll hustle, work extraordinarily hard for you to add value in the ways that I know how to do it. But if you do have a great deal and you're brand new to this and you're trying to raise capital from a person like like myself, I would just say, if you sit up and sidle up next to a person who's done this many times and then you approach, you're going to get a much better response.

Michael: [00:31:33] So again, guys, if you listening to this, gals partnering with more experienced ones really opens doors. So that's really cool. Now, earlier you said there's three things that you look for when you're investing. One is sponsor, the other one is market and deals. Talk about what you're looking for in in the markets.

Spencer: [00:31:50] Yeah. What's so cool about this which really like it kind of confused me at first. Michael when I was getting into this a few years ago was how much publicly available information is just sitting out there for the taking. And you can research stuff at the city level and at the neighborhood level. And there's websites that you can just go on right now. Anyone can do it and you just. Don't know what to look for. So we look for at the city level and at the neighborhood level, thriving, growing markets. And you'll hear the term both in, you know, I would say podcasts as well as just blogs and articles out there Look for markets with quote unquote, fundamentals. Right? Strong fundamentals. But what does that really mean? What that means is let's think about it for a sec. An apartment building has tenants. Hopefully it's occupied by people that are paying the rent. What is that rent come from? Well, that typically comes from their job and that job comes from an employer. And so you get the point. I think it's so straightforward when you think about it in how do you vet the fundamentals of a market? It comes down to job supply. It comes down to the demographics and how many people are living there, how many people are moving there. And so the markets that you want to look at primarily have all of those things going for them. You know, they have strong jobs. They're expected to continue having strong jobs. I think a common question that has come up a lot recently and it's a fun topic to debate, frankly, is there's a lot of talk right now at the national level about a correction and a recession. And one of the things that I didn't really wrap my head around until I got into this business was that real estate at a local level is really a different animal. And let's say that five, six major employers go into a large city and they expect to continue hiring, continue growing. That is a correction counterweight. That is a recession counterweight, right? That is how you go in and you're able to say, hmm, this market, this city all the way down to the neighborhoods and zip codes if you want to, that has actual evidence on paper that I can pressure test. That shows me even if there were to be a downturn, I'm still confident in the pro forma on that project. And it's because look at all the people moving there. It's a highly desirable area, you know? Et cetera. Et cetera. So it tends to get me excited because you can really nerd out on it.

Michael: [00:34:12] Well, this is great. And clearly you do Spence. So are there any resources that you can recommend to the past investor to maybe check out cities or even neighborhoods, anything that comes to mind?

Spencer: [00:34:21] Yeah, you know, think think it's been mentioned before on your podcast. So I want to bring it back up because it's so helpful, which is City hyphen data. There's actually another one called the Department of Numbers. It's kind of a funny, but the Department of Numbers Dept, Department of Numbers and you can look at things like job growth in the past year was just analyzing a market yesterday and it showed how job growth for the last year for this one market was almost 4%. It's a large market too, and that is just a beautiful thing that you want to be able to see, you know, So you want to start just getting practice because it's going to seem like an alien language at first and it does for everybody. It just takes practice and all you got to do is start poking around and looking at those websites. But the most basic, if you just want to start getting an understanding, just go to Google and literally type in a major city that you have an interest in and see on the Wikipedia listing, it'll have population, it'll have things like let's look at the year 2000 all the way to, you know, reasonably about 2017 is when you're going to see reasonable data. So you can look at that trend over time.

Michael: [00:35:24] That's fantastic. And a third category is deals. So you've got a strong operator, you've got a strong market and now what do you look for in a deal?

Spencer: [00:35:33] Yeah. You know, all of the deals that we have invested in so far have been value add deals. There's so many of them out there right now. And think value add means something very specifically. It means the operator or the sponsor is going to go in and, you know, pull some of these these levers, whether they're operational or even management driven, and they're going to improve the value of that property over a period of maybe a couple of years. And so what we are looking for at the deal level is, well, are they specific in how they're going to do that? You know, if the expenses are high, what are the things they're going to do to lower those expenses? An example on the on the increase of income side is if they're going to add value by increasing the income that comes into that property, they're going to look at rents. But also, are there other ways to do that? Maybe there's, let's say, paid parking and they haven't actually been charging consistently. Maybe maybe there's other services, maybe they have a like a property we actually looked at recently was like an onsite car wash. You know, it's just like a place where you put in some money and you wash your car.

Spencer: [00:36:41] You know, it's that kind of stuff where it says, funny as that sounds, adds real value to a property over time. And so those are the kinds of things where you can actually go and take a look and say income and they say value add. How are they actually going to do that? And can they speak to it in detail expenses? How can they reduce them, make it more efficient? And is the value add thing real? And in addition to that, of course, looking at the asset itself, if you're vetting the deal, yes, it matters that you have the right sponsor. But if there's a way to get firsthand in any way, like really good insight, like if it's someone who's willing to take pictures for you, maybe do videos of the property, not just the pro forma broker packet and take a look at it, really get into like like the interiors and stuff of a property. I love to see that because then you feel like you're getting it a little bit unvarnished. And if it still looks good, you're great. You think you're good to go.

Michael: [00:37:36] Is that something you do yourself? Do you actually hop on a plane and go out there, or is it something you ask the operator for? Or how do you how do you get that? It's a good idea.

Spencer: [00:37:43] I mean, as a passive investor, I would say you ask for that from the operator. If they can't do that for you, then they'll typically the good ones will be willing to find a way to get that back to you with someone in their network who can help you out.

Michael: [00:37:56] Yeah, exactly. And frankly, the operator should have those pictures anyway from the due diligence. So they should have that stuff. It just may not look as attractive as as they do in the in the marketing package.

Spencer: [00:38:07] That's right.

Michael: [00:38:07] Yeah, exactly. So so that's pretty cool. All right. So thank you for that. That's that's really awesome. Now you're doing this stuff and you're basically quit your job. And now what are the people around you think of all this or your colleagues, your friends, your neighbors? Like, do they look at you kind of funny? Are they intrigued? Like, what's the reaction?

Spencer: [00:38:24] That's been the first reaction has been utter confusion, right? It's just like like you are this tech career professional executive who's been doing that for more than a decade. What's with the real estate thing? Thought you didn't like that because your dad did it. And so over the last three years now, that has evolved rapidly because people see, oh, this isn't like a trend, like like this isn't some fly by night thing for you guys. You guys are actually really doing this a lot now. And we recently kind of gotten more active because those questions were coming up so much and so around this area. And in the in the kind of tech scene, I would say in the Bay Area, there's so much shiny object syndrome around things that are digital and things that are new. And an example would be crypto. You know, you got a lot of enthusiasm around stuff like that. And there's people that of course make make plenty of wealth off of those, but there tend to be very savvy. I have found that when you get them to look at the projects, you get them to look at the numbers and the returns. All of a sudden it's like, Oh my God. Like, how come? How just how come I didn't know about this yet? And and at first there's this deep skepticism because so many folks in our network consider themselves to be smart. They are very smart. And that's right. And it comes down to this interesting notion of like almost a defensiveness of how could this have evaded me for so long? It's like.

Michael: [00:39:49] Exactly. Because if that's the case, then I'm just not as smart as I as I as I think that's interesting. You get so you get a lot of resistance in now because people are getting defensive about it.

Spencer: [00:39:58] Exactly. And I was like, wow, why is this person resisting this so much? You know, and I haven't had a coffee last week with someone who we just kind of hit it off. And the but he has invested in a couple single family homes. And I walked him through how we've been investing. And he's like, hey, I don't know. It just sounds too different to me. I'm going, I'm going to keep doing what I'm doing. And I was like, Hey, more power to you. Good luck.

Michael: [00:40:21] It's interesting. I still get this. I still have friends who've watched me do this over a decade. And have they invested a dime with me? No, they haven't. They just can't yet. They're putting tens of thousands of dollars in their. Mutual funds and a 401. K's. And it's you know, my conclusion, Spence, is you can talk to as many people as you want, but it's it's more of like a a fishing than a hunting sport. You know, you just kind of throw the line out and you see who's attracted, who's attracted to my lure, you know, And some people are like, I don't like that. And they just go away and you're like, okay. But then there's people who come like, certain people have certain sense of readiness because otherwise it would be a very frustrating thing. And sometimes, you know, I get little forceful with my friends because they just don't see it. They're like, How can you not understand what I'm saying? Why are you not taking action? So it's interesting you're going through that same reaction. But nevertheless, I'm sure there's people who are very intrigued in what you do and are probably ready to invest.

Spencer: [00:41:12] Oh, very much so. I mean, like even just in the last week, I would say, you know, it ebbs and flows in terms of people and like in a network who suddenly say, you know, they go to a dinner and they talk about it and they bring up their friends and suddenly out of the blue, I'm like getting these random questions from people saying, hey, I heard that you guys invest in these things. Like, what are these? It sounds really cool. And but then again, you know, this fresh on the heels of what I thought was a very surprising coffee that, you know, where the person was super close minded, that they wouldn't look beyond the single families because that's just how they invest. It tends to to snowball very quickly. Once you find a person that shares that enthusiasm with you and they go out and they they educate, that's really been a big focus of mine now is like people just don't necessarily know about these things. So it's not a new concept, which is so shocking to me. Michael But you know, they still look at it like it's this foreign thing.

Michael: [00:42:02] Well, one thing, you do something and it works for you. You know, some kind of, you know, whatever something you makes you lose weight or whatever, do something. You're like, this is so cool and you want to share it with people. And so I think it's very similar with this as well. You just want to share it with people. Now, have you come across anyone who actually wants to do what you're doing and what do you do with people like that? Yeah.

Spencer: [00:42:20] So, you know, we recently have actually decided to get more active. And so this is also built some confidence that I'm actually going to accelerate the timeline that we were talking about at the beginning of our conversation today. Michael, to end up going full time into real estate. It started off as like a, hey, we're going to invest, let's build passive income. This is for our family, for our future. And then the frequency of questions were coming up so incredibly fast, we decided there's something here. You know, there's such a massive education gap. I feel like almost an obligation to make sure that people understand this stuff so they can make an informed decision about what to do next in their lives and help secure their family. Because all those tech grind narrative points, you know, that we talked about earlier, are they're prolific, they're all over the place. And and parents out here are overworked and they're tired and they don't have an exit strategy of their own. So we wanted to help people with that. So we actually launched our own business now and we are helping educate people just on how to get involved with these types of projects. And so we started our business called Madison Investing, and we provide educational materials for people so they can figure out how to actually get involved with that.

Michael: [00:43:25] That's fantastic. It's a great mission. And I recognize this about a year ago that we told you earlier, the passive investors, they want really the same thing that the active investors want. They want it. They want financial freedom. I think it also goes back to what you're saying. They want some kind of financial security. I think I think in the beginning that's certainly how it started off with you. You want you want something some other stream of income that if you lose your job or worse, that there's something for your family. And that's typically how people start. And then they shift and kind of, oh my gosh, I can not only do that, I can literally like quit my job. It's like this mind blowing thing. But then this mission of educating literally the Wall Street investor. And they're we think we think that we're competing with each other. Spence You know, and all all my peers out there, we're not we're not because there's so much of it out there because there's so many stock market investors out there. And and we're only reaching like 0.01 of all those people. And there's a lot more of that. And we all know that Wall Street stock market, inconsistent high volatility uncertain future, high fees, high taxes. And we really want other people to do better, right? That's what you're doing. What you're doing is you're so passionate about it. You just, you know, you want other people to do what you're doing because it's so great. So really, we have this common mission to educate the masses about how to better invest their money and secure their family's future. So that's right. It's awesome that you're doing you're kind of probably weren't thinking that the two years ago that you're going to start educating people. But here you are educating people and I love that. So so you're going to get into into this kind of educational role. What else is next for you? What do you what do you see kind of playing out in the next year or two?

Spencer: [00:45:03] Yeah, you know, I think figuring out how to scale this impact, you know, one of the things that I'm actually really passionate about to bring over from my corporate career, from my tech career, is actually do a lot of professional development. That's one of the roles that I hold from that career. And one thing I've noticed on the real estate front, particularly as it relates to passenger investing, Michael, is that there's not as many options for people to access modern versions of the tools and just digestible little education bites that they can fit into their busy, busy day, right? Like most of the people that we actually are helping now get into these types of projects passively are folks that are like, maybe they're a medical professional and we have we have a handful of those in our group, right? So they get home at 9:00 at night and they don't have any time to go and do like an hour long call sometimes know how do how do we give them like a five minute rundown on how to vet a deal? And so that's right. Getting my impact scaled beyond a one hour call that I have to manually have. And I love having these types of calls with the folks that get to educate every single day now in our network. But how do I scale that? And so building out a platform with that kind of content, frankly, that's not going to be paid. Like I have interest in trying to make that free as much as possible. So I want to make that available to folks so they can find the resources they need and invest further into their future and understand that this is not some niche thing that is weird. It is like the core tenant of a wealth strategy and it's the best one that they can possibly find. And so I think getting that word out is not going to be rocket science. It's just going to take some sweat equity from our end and figuring out how we have to invest to get those those education resources out to people.

Michael: [00:46:46] That's great. Spence How can people connect with you?

Spencer: [00:46:48] Yeah, they can just go to our website. Michael, it's or just shoot me an email. Spencer at Madison. Happy to help them or answer any questions they might have. They can also just join our mailing list. We send out educational resources to members of our list.

Michael: [00:47:05] That is fantastic. Hey, thanks so much for being on the show today.

Spencer: [00:47:07] Spence Oh, it's been a pleasure, Michael. I'm a huge fan of yours. Thank you so much for having me.

Michael: [00:47:12] So if you have a passive investor, then Spence just broke this down to step by step how to vet a sponsor, how to find the right market and how to analyze or evaluate a deal. The most important thing, he says, is the sponsor. Because if you pick the right sponsor, they're going to pick the right market and the right deal. Now, you should still be asking questions, okay? You shouldn't just blindly write a check. You have to know kind of what questions to ask, But the sponsor is the most important thing. Also, note that he says he's investing with four sponsors, not with a dozen or two dozen sponsors. It's not like picking a well-diversified, you know, basket of stocks or ETFs. No, it's a very small number of sponsors. We had a few past investors on over the last few months, and the theme is the same. They're investing with one, with two, with three sponsors, a very small amount of sponsors, meaning that it's a little bit of upfront work to evaluate that sponsor. And so that part is, I suppose, active. But once you make the investment, the investment is passive and more importantly, the second time you invest with that sponsor, you're not having to vet that sponsor.

Michael: [00:48:13] Yes, you're going to be on their webinar, you're going to evaluate an opportunity, but you're not spending a lot of time getting to know them. See if you can trust how trustworthy they are. So what I'm saying is you don't need a lot of sponsors to invest with. This is super encouraging and for you. Active investors out there just know that when you attract a passive investor, if you play your cards right, you nurture that person, you communicate with that person, you serve that person, they will keep investing with you over and over and over again. So hope you guys find that useful. If you are listening to us right now and you are a passive investor and you're a little bit on the fence about taking money out of the stock market, which we all love, I encourage you to download one of my reports I created called What's the Better Investment Stock Market or Real Estate? And that report is at the The Michael Blank forward slash report. I think you're going to find it super, super interesting because it will shed the light on the true actual returns of the stock market and also educate you how multifamily investing works as well.

Michael: [00:49:10] If you're ready to go and you're kind of sold on the idea that invites you to schedule a call with us, you start that process by joining our investment club and you go to Nighthawk Nighthawke is are actually investment company go to Nighthawk and you click on the join button and you fill out a very, very short, short form and then schedule a call with us and we'll get to know each other a little bit, kind of in a way that Spence talks about and make sure there's a right fit and we'll get to know each other and then we can show you some upcoming opportunities that we have. So there you go. All about passive investing. It's always good as a passive investor to educate yourself and listen to others who have done that. I'm just getting more and more excited about the passive investor path of financial freedom. So if you are a passive investor in multifamily syndications and you have quit your job, please reach out to me. I want you on the show because it is such a cool path to the same goal of financial freedom. So thank you so much for your time. Catch you guys next episode.

Intro: [00:50:05] Thanks for listening to the Apartment Building Investing podcast with Michael Blank. For more free podcasts, articles and videos, go to the Michael There you can also download the free e-book The Secret to Raising Money to Buy Your First Apartment Building. Till next time.



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