The Real Estate Takeoff Podcast

Episode: 184: Vetting Sponsors and Deals: Key Considerations for Passive Investing

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Sean de Martel: [00:00:00] This is the real estate takeoff podcast show number 184.

Intro: [00:00:06] And now out of San Diego, California, streaming to listeners around the world. This is the Real estate Takeoff podcast where we'll talk all aspects of anything real estate investing related as we host a variety of guests who are active in the real estate game. Be sure to follow the show on Instagram at the real estate takeoff. Now here are your hosts, Mike Tai and Sean de Martel.

Sean de Martel: [00:00:36] Welcome in listeners to another really awesome of the Real Estate Takeoff podcast. Today we got a really awesome guest named Spencer Hilligoss. Now this episode is going to be good for you, whether or not you're an active or passive investor because Spencer specializes in passive investing. But if you're an active investor, you're also going to get to hear a take from these passive investors and how they're vetting sponsors. If you are a passive investor, Spencer is going to go over not only his company that specializes in identifying good operators, in helping passive investors vet those operators. So he goes through his process for that, what he looks for in operator, some of the key things that are yellow flags, red flags, green flags. And he gets into detail about how he goes through his process of analyzing a deal and whether or not it fits the criteria for him and his other passive investors. So this is a really great episode. I think that, like I said, whether or not you're active or passive, you need to hear this because vetting sponsors and making sure that if you are a sponsor, if somebody vets you, that you're ready for it, are really, really key things for a real estate business. So without further ado, let's bring in Spencer. And if you haven't already, check the show notes so that you can follow Mike and I on Instagram where we're going to start posting a lot of daily content about our projects and our journey in this real estate. So without further ado, let's get into it. All right. Checking in on the show, we've got Spencer Hill. Spencer, welcome on the show.

Spencer: [00:02:03] Honored to be here, Sean. Thank you so much for having me here.

Sean de Martel: [00:02:05] Yeah, so happy to have you on the show. Just to start off from the top, let's give our listeners a quick breakdown of what you do in the real estate space.

Spencer: [00:02:14] Yeah, So these days it's a little surreal to say we started as passive investors. I was in tech companies in Silicon Valley for 13 years, but now I find myself five years now, six years in to passive investing. And we meaning Jennifer and I, who's my wife, I'm a co-founder of our investing group. We just hit our milestone that we thought we were going to hit for our passive investments, our monthly income number for financial freedom about six months ago, and we're super proud of that. That was hard fought. There is endless stories to tell about that, but to keep it brief, I'll just say we thought it would take us 15 years. We chopped that number down to seven. We ended up hitting it in five, and I grew up in a real estate household. My dad was a broker, but that's what scared me into tech for 13 years. Sean, you know, I didn't want to necessarily be doing open houses as a teenager. I didn't want to be cleaning out fridges in rental properties before that. And it's not cool to tell your friends you work for your dad's real estate company when you're growing up surrounded by tech companies in the next Googles and Ubers and Facebook's. Et cetera. So these days, the number one title that I carry, you know, after my tech career is that of Dad. I have two young boys and proud husband and founded an investing group with my wife and better half Jennifer. So it's been a ride and, you know, primarily a passive investor first and foremost. But we got active as well, you know, been in over 60 deals in multifamily and storage, either on LP or co-GP or both, and very open about how the journey has gone because it's a learning journey, as you know.

Sean de Martel: [00:03:43] So have you quit the tech job now that you guys reached your financial freedom goal for passive income?

Spencer: [00:03:49] Yeah. So ironically, like I left my job faster than we had originally planned. You know, we all talk about fantasizing when we're working full time about, oh yeah, burn the boats, you know, rip, pull the rip cord, whatever analogy we want to pull out. I left my day job in 2019, five months before Covid, which was not the plan, but I would say I hit my 70% of my income from my day job had been replaced at that point by passive income with a little bit of unexpected side hustle pop that I was starting to see. It wasn't planning on building a side hustle, but that's how life evolves, right? And so I left my job. Then Jennifer left her career totally separate from mine, you know, equally successful as a marketing and e-commerce executive in different companies. She left hers in early 2021, so I was late 2019. She was early 2021. And now the primary focus for us is just striking the balance in a full life. You know, and this isn't going to be TMI, hopefully for folks, but I'll say in about three days from right now, quite literally, we're going to go do a first first of a kind thing in our family. We're going to go live in Portugal for about just shy of two months with the whole family. And it's not a vacation. I mean, it's living there.

Sean de Martel: [00:05:03] That's awesome.

Spencer: [00:05:04] Yeah. You know, and it's going to be an adventure. Everyone thinks that sounds glamorous and it's like it's life, right? It's not like sitting on a cruise ship. It's not like going and sipping mai tais. It's like our boys will be there with us and it's a whole different path of life I never would have expected a decade ago.

Sean de Martel: [00:05:17] Yeah, I mean, talk about a way to just be able to be so much closer to your family to have all of that time back. I mean, that's the most valuable thing. The first question that came to mind, though, you know, you've crossed that threshold into living that life of your dreams and you're still building. But to get to that point usually takes an immense amount of sacrifice. Yes. So I'm really curious, you know, having a family that you're also trying to focus on at the same time of trying to leave that day job. Do you mind sharing like some of the challenges and some of the sacrifices you had to make in order to make that happen and continuously invest in those deals?

Spencer: [00:05:51] Absolutely. You know, in hindsight, I question how I was able to tap into this place, because you kind of have to draw from within in a whole new way if you're going to go through a period of push like this. But for context, I worked in five fintech companies or financial tech companies, starting with big familiar one Intuit®. They make QuickBooks, TurboTax and want to put people to sleep here and talk about payroll and taxes. But I'll just say I progressively sought out earlier stage companies intentionally, and I took multiple pay cuts over that career because I wanted to seek more challenge and learning that that all happened before this passive investing adventure started. But I somehow found myself in the guts of a lending company and it was a lending tech company. They used to be called LendingHome. Now they're called Kiavi. Not paid to say that. I'm just was a fan of the journey and a fan of the company still. But I saw folks building in the evenings. I saw co-workers, I saw people I was managing, and I was like, Man, these guys are doing something. They're kicking ass in their day jobs. Their building side hustles their work until late nights on something else, and that was quite inspiring for me. Sean So like that really lit the fuse for me to be like, What's my excuse? You know? And I got the bug because I saw the financials from some of these fix and flip projects, and that was the types of deals that we were funding at this company. It was 600 loans per month for single family fix and flips, which I cannot swing a hammer. That's why I'm not a flipper. I cannot fix stuff around my house without YouTube. But I do know partnerships and I do know hiring. I was thrust into leadership of managing teams of over 200 people at the age of 27, way in over my skis, you know, So I knew some stuff about business and I knew what I didn't know. But during that first couple of years, man, I mean, I was waking up deliberately while building our business and investing passively, aggressively from 4 a.m. to 6 a.m. That was my work before work. Wow. You know, and I'm sure you're familiar with this of your own version of this, right? Yeah, it's it's what's required.

Sean de Martel: [00:07:43] Absolutely. I think that if you want to get to those kind of if you want to expedite, especially if you want to expedite that journey to getting to that financial freedom quicker than 15 years like you did. I don't think there's any way around making sacrifices like that. You basically have to sacrifice your time and money as much as possible to expedite that. Otherwise it just takes longer.

Spencer: [00:08:05] 100%. So well said. And I think in hindsight, I look at that like what drove me to go and work like a maniac that way during that time. And I still find purpose in work. I'm a better person when I'm working on something I care about, so I'll always be working in some fashion. I love sitting on a beach. I love playing guitar. I love, you know, going, getting in the water, all these wonderful things. But I'll always find purpose in work. So I just want to mention that to folks that like on the other side of financial freedom doesn't mean like, I want to sit around all day. It means it gives us the tool to go and help serve others and be a better dad and better husband. Right. But on soapbox, back to your question though, Sean, like putting away my guitar for two years sucked. That's one of my hobbies, like putting away the less important stuff, but fun stuff. Netflix streaming binges. You know, I love it. I love video games. I always have. I'm a huge gamer. These are all, you know, short term sacrifices and well worth it. But saying no to virtually everything non-essential from a social perspective for two years was not fun. You know, not going to see a concert that our friends wanted to invite me to, not going to happy hours with coworkers and being maybe taken a perception hit from folks thinking I'm particularly antisocial, mean, I'm an introvert, but come on, it's not fun to have to say no to people that way. So yeah, I won't bore people with the laundry list of that beyond it. But I'll just say those are in hindsight pretty basic sacrifices. But it was still hard to do over a period of two years and then grinding in the morning to read 24 books in an 18 month period and listen to 400 podcasts in that same period of time is a lot.

Sean de Martel: [00:09:36] No, absolutely. And my journey is honestly almost identical. I was an air traffic controller before this working crazy hours, mandatory overtime, usually had one day off a week, worked weekends. My usually my day off was Tuesday and I missed out on tons of things, but simultaneously I was trying to grow my real estate business and I'd be working in the break rooms. I missed out on basically everything. I mean, it hurt relationships both for friends and loved ones. But and I specifically remember this girl at work saying to me, like, commenting on what I was doing. And she said, That's just not for me. I work to live, not live to work. And I remember thinking in my head like, you know, that's a great point, but that's why I'm doing this, actually. And I think that a lot of people it's hard for a lot of people to conceptualize and put I guess even risk their time might be a way of putting it because they're worried it might not work out. And they're sitting there putting all that work in and don't know if they'll succeed. But I remember putting in all of that work, missing out on lots of things, just like you and a lot of people, you know, when they're looking at that are thinking like, man, this person's just wasting their life away. But in reality, it's just to expedite this process so that I can actually live that fulfilling life that I'm dreaming of. And I think that's something that a lot of people miss.

Spencer: [00:10:52] I appreciate you sharing that, Sean. So mean, I have to ask you in kind, like was there a point where if you went back, I promise I'm not going to make this interview about you, but if you go back in time like and you said what you just said to your younger self, would you have accepted that advice?

Sean de Martel: [00:11:06] Oh, that's a good question. I think I would have because I've always like been grinding and working hard, trying to, you know, have a better life. You know, I came from a poor background, joined the Navy to get out of my town, all that kind of stuff. I think I would. And if I could go back and tell myself, I'd probably smack myself in the face and say, Dude, start now. Yeah, start now. Because time is money. And like, you know, I think a lot of people to Spencer think to themselves, well, I'm in my younger years right now, you know, I'll do this slow play and live now so that I can live that fulfilling life when I retire. And I think guys like us just think to themselves, man. All the way to 65 or 60. I'd rather scrunch it down. It's almost like getting a cost seg study. Let's scrunch this down instead of 27.5 years. Can I just, like, do this in a couple so that I can front.

Spencer: [00:11:59] Load those losses?

Sean de Martel: [00:12:00] Man Yeah, exactly. I'm trying to front load them, but yeah, I think we, we think very similarly on that topic. My next question for you, though, I want you to tell me a little bit about the firm you and your wife started, because is this like a passive investing type of a business or is it is that the active side?

Spencer: [00:12:18] Yeah, So it's actually both. And I don't have a good comparable, you know, for another type of business necessarily out there. But I would just say it's very simple. We never had some master plan to start this business. It started truly as us investing, as passive investors. We went through the same rental phase and I'll directly answer your question, but this context is key. Like we went and bought the local rental 430 grand for a Bay Area California rental that generates $200 a month in cash flow is not a cash flow win. Right? Right. Still have it. It's gone up a couple hundred thousand bucks in value. That's great. It doesn't change your life. Spent way too much money on that phase two. And I'm saying this all cleanly in hindsight, this was not a clean process. This was a messy and it took like a couple of years. Ah, and they always are. But the next stage we got into cheaper rentals. We bought long distance, we bought up to five rentals out in Kansas City, Missouri, 60 K per mind blowingly cheap by our standards, right? And I was like, great, 250 bucks a month on average in cash flow. Wonderful. And then you're like, Oh, this is what it means to invest in plus or minus class areas, and it turns over once a year and one tenant leaves, wrecks your place and you've got all that to 50 per month wipe for the entire year. So you go through those learnings and those two phases led us to, Oh, you can invest passively in these bigger deals. And probably similar to you, like when I was working full time, we were not wanting to add overhead. You know, we were not wanting to add time commitment because we were full man. I was working a full time career, leading teams of people, etcetera, had, you know, growing family, two young boys and all that said, like when we finally invested as an LP the first time we put like 25 K into a multifamily deal. Granted, I know the market conditions were favorable, but the team did a good job. Eight year old was a plan on the deal. It exited in two years and we more than doubled our capital. So we're sitting there going. All that we did on that was review the deal, sign the docs, wire the money. And so that was pretty eye opening. Then it was like, I'm a big framework guy, you know, I've always sought out those challenges of being surrounded by people that I thought were far better at, you know, skill, expertise, knowledge than I was. And so in Silicon Valley, there's a lot of smart folks. And so I soaked up the knowledge of working in some of these early stage companies, man, Like really challenging 60, 80 hours a week, but surrounded by excellence, just like, you know, I went to Boulder, right, for college. I went to university, Colorado, Boulder, go buffs, drank beer and snowboarding and learn a few things. But some of these folks in the working world, I was exposed to how they frame work and make really complex decisions well, quickly. And we built a framework to invest more effectively into these deals because that just made sense to me, you know, like, like how can I de-risk these deals? And so once we started doing that, put money, you know, chunks of money into these passive deals for multifamily and then storage our network to, you know, how it goes like organically coworkers and beyond. They were like, well, what are you investing in? And I had this level of expertise that I had honed and built over time. I was exposed to a lot of things like underwriting within the company I was at in my day job, which helped for sure, but it's very different single family than multifamily. So I had to beef up on all that expertise. And long story short, there was a business there, man. There was a business there because no one wants to get on a plane to go walk a 300 unit apartment building in the middle of Dallas or Phoenix or Atlanta or multiple cities in Florida. But they do want to participate and know they can de-risk some of this stuff with someone they trust. And so ultimately, our Madison Investing group is basically we invest in sponsors that we have have already liked that we planned on investing with Anyways, once we've done that and we put them through our vetting framework, we have like a five part vetting framework, then we are willing to look at that sponsors deals on a case by case basis and if it passes muster, then we share that deal to our group and that's it. You know, I'm registered with FINRa, we don't have a fund, so it's not like a fund layer, like it's literally just, Hey, here's a great deal from a sponsor. We've already vetted and trust. You know, come and join us if you want to, but no worries if you don't.

Sean de Martel: [00:16:19] Think that's awesome, because I think so many passive investors, I think even if you have a high level understanding of finance and things like that and you're trying to invest in a multifamily syndication, for you to be able to properly vet the sponsor. And the deal is still it takes a high level of understanding of multifamily. If you don't know the basics of cap rates, what's a conservative exit cap like? How would you know? Vetting that kind of stuff is definitely something that is a skill that you would have to learn if you want to get that in depth. So was your can you kind of maybe tell me a little bit about your framework that you developed for vetting the sponsors and deals?

Spencer: [00:16:54] Yeah. So first and foremost, no surprises here. I cannot take credit at all for the three pillars of looking at any passive deal. Someone brilliant out there many years ago came up with the notion of look at the team, look at the market, look at the business plan, and you know, those are the fundamentals. But under that team that who like you're trusting your money with a total might have been a total stranger sit in a different part of the country you know so we have to sit there and say what goes into vetting it in five parts. So number one is the team like who is on that leadership team? And there's a 70 point spreadsheet with that with sub bullets that backs this thing up. So I'm not going to bore you and your audience with this now, Sean, but I'll say the high level bullets are team approach, communication, you know, legal and values, you know, and like some of those are far more technical. Some of those are more qualitative, you know, and under approach. I will say, here's an example of something I put a premium on. Now, repeatable process. Repeatable business process is key. And like, yeah, the team has to have the track record, but a team with a track record that does value add multifamily that suddenly decides to go do a development in a completely different state on the other side of the country, does not have a repeatable process for that. So it doesn't mean it's a showstopper. It doesn't mean that like to use the term from within the guts of working at a lender. They would not fit my credit box. So I would expect to see significant compensating factors. Right. Right. To put that in more layman's terms, there has to be something to compensate. If there's a deficiency somewhere in that five part framework picture and maybe just two non-negotiables, I would say. And there's more, but here's a couple that are really tangible for folks. If they're like, What the hell is this guy talking about? Number one on values. It sounds so squishy, and I get it. I know for the data scientists out there that are going like, I want to see that reversion cap, you know, it's like, got it. We've passed on working with a sponsor who otherwise was super strong on paper, great track record. But when asked them three times in a row, Hey man, like walk me through like, what's your philosophy on the tenant experience, you know, and don't need like a perfect answer to that. Like, it's not like an interview. It's just kind of wanting to understand that, amongst other things. Do they know there's human beings living in these buildings? Like and I'm a capitalist, so not turning into something else other than that, you know, they didn't answer the question. They dodged it and they made it about the quantitative. And I'm like, Cool. Hey man, wish you all the best. Let's catch up some other time. And we're still friends today, but we just don't do deals with them. Yeah. You know, the one other thing I was going to share was, you know, the ability to fail and bounce back, you know, like. Like failure response is, I guess, the brandable way to talk about that, meaning everyone has lived life long enough or been through business long enough or started a business. Sean And you've lived through this. You get kicked in the figurative teeth.

Sean de Martel: [00:19:44] Absolutely. I think that's actually a great question to ask sponsors because and sorry to stop you, but so many sponsors that have podcasts and that have these big portfolios, you never hear of their failures. And we know that they failed somewhere. They had to have. I don't believe it if they say they haven't. So Mike and I, my business partner, we're so open about our failures that we make content about it. On my very first deal was a 32 unit apartment in Indiana and we ran out of money, which is a huge mistake. Now, we were able to secure some private debt in order to finish the business plan, and we still actually three x our money. But boy, did I learn a lot of lessons there. And I like to share those lessons because I really think that people need to not fear being honest about those mistakes because that's what you build off of. That's the biggest learning experience that you can have is in the streets doing it.

Spencer: [00:20:35] I love you sharing that man. Yeah, I think every person has the example, and if they don't, then it's only 1 or 2 things, right? It's like that either means they haven't experienced enough, which is a deep red flag or they're not being forthright. It's like in either case, it's a no go. So I really appreciate you sharing that.

Sean de Martel: [00:20:53] Yeah, absolutely. I'm happy to share that kind of stuff. I think transparency and telling people about your wins and losses is always going to go a long way. I think that another thing like, you know, if any listeners out there are thinking of having their own investors in the future, always make sure that you're sharing everything. So if the properties occupancy goes down to 88% because you had a couple tenants that you had to evict, tell that to the investors in the update. Like even if it means that the NOI dropped a little bit, you know, if you're honest and you tell them why it happened and what you're doing to fix it, I think a lot of times people are just going to say, okay, I totally get it. That comes with the territory of this business, Let's go. But if they find out after the fact, like later on down the line, they're like, Oh, well, you didn't tell us that there was a fire in one of the units or something, or you didn't tell us that the floating rate debt cap needed to be reset and this and that, then it's not a good look.

Spencer: [00:21:47] And that's timely stuff you're bringing up right there on multiple fronts. Oh yeah, that's awesome.

Sean de Martel: [00:21:51] It's happening across the country too. Lots and lots of investors or to lots and lots of deals. And I wonder if those sponsors are being honest with their investors.

Spencer: [00:21:59] You know, I think the transparency and communication is something that early on I talked to a very experienced LP you know, it was like they were not a sponsor, but they prided themselves on being a very experienced LP with more gray hair than have now, although my two kids are adding to that. Finally, they basically said that there's no shortage of deals. Right. Ever. And I was confused by that at the moment. At that moment I heard this is about 5 or 6 years ago and I was like, what do they mean? So now it makes sense. There's always deals to be found. It just depends on what type and what's your personal investment goal and can you find something to align to it, yada yada. But ultimately what they said was they can always find a good deal. What they can't find is a good deal, but also a team willing to give them bad news quickly.

Sean de Martel: [00:22:45] I like that.

Spencer: [00:22:46] And I was really you know, I took a beat there to try to understand that better because in the end, I heard it because then I heard it again and I heard it again. But almost always from the people who had more experience and more capital deployed than I ever have. Right. Like I've put over seven figures of my own capital into passive deals in the past, like five, six years. And like, that's chump change compared to some folks. And like when I talk to those folks that have a much bigger number, maybe a zero behind it added or. Do than I do. And they say like, Oh wow, like a deal can be good, but they just want to know they're working with someone who's going to tell them bad news quickly. Like, I think people should listen to that because there's wisdom in there that also tells you like being a passive investor who's who's making prudent decisions doesn't mean finding the prettiest looking IRR on a marketing deck to max out the potential return. It means you're looking for a truly risk adjusted return, knowing that 100% of the time in a real estate deal, unexpected obstacles happen 100 freaking percent of the time. And so you just need a team that's going to tell you when those happen and that they they know how to react when they occur.

Sean de Martel: [00:23:50] Absolutely. And it's funny because I just made an Instagram reel the other day and reviewed it right before I got on this podcast with you about, you know, some of my tips for avoiding running out of money or this or that. And one of the tips I gave was to always have 20% of the renovation budget as an additional capital, as contingency capital, because things always go wrong. Every single deal I've had, I've had something that cost me money. The clay pipes collapse somewhere and I had to redo those. Usually it's with plumbing. I'll just get that out of the way. But there's always something that I have to replace that's almost impossible to catch in the due diligence phase because you can't rip off all the walls and look at every pipe and stuff like that. So you got to you got to be ready for that stuff and it's going to happen. And on that note, though, you reminded me that like having somebody like yourself with this firm, that you began to help passive investors vet and find good deals, a huge value you have is being able to look at these kind of things because you mentioned, for example, like the exit cap, things like that, or, you know, a sponsor having a beautiful pitch deck that shows amazing returns and a great plan and story for the property. But so often I've had people show me deals and the returns look great. And then I see that on their exit cap, they projected, you know, a 0.1% increase in cap rate over a 2 or 3 years, which is a little is lower than what we use, but not to bash anybody. But I remember actually, you know, just a couple of years ago, I'm fortunate enough to have a mentor, 8000 apartment units that taught me how he underwrites. And I remember thinking like, man, we just it was so hard for us to make any deals. Pencil. I remember showing pitch decks that, you know, our IRR exit was lower than so many of these other sponsors. But what I think so many passive investors just didn't know when they're vetting is those guys are not being as conservative.

Spencer: [00:25:41] That's right.

Sean de Martel: [00:25:41] So, you know, you have these amazing returns, but on a risk adjusted basis based off of how they're planning to exit the property, there is a little bit more risk there. Right. And I think that that's a huge value that you're going to be able to bring people.

Spencer: [00:25:54] I mean, you hit on so many wonderful threads that I want to pull on because they're just fun for me to nerd out on with you here. Sean I think that like, ultimately I will just echo what you said and say. If I'm a passive investor looking at two different deals, deal A deal B, two comparable markets, maybe even A and B in the same market and it's great, right? Universally, you got the whatever metric you want to go and do that, you know, let's pick the if you had to pick one single metric to call a good market, call it jobs, right? There's there's like 2 or 3 dozen you got to pick in that mix property, pick property A property B, good market and you're looking at, oh, this IRR and this IRR or, you know, this annualized return, this annualized return. And you're sitting there comparing, oh, these two sponsor teams look decent enough. It's just not enough to look at like there has to be a deeper comb through. And in the end, I think a lot of folks right now are getting some education. I mean, all of us are in the market that's occurring right now. But I would say a piece of advice that I also got early on, it's more of a question, like a guiding question from a from a mentor of mine. And he was like, Spencer, when you go into an investment, I want you to ask yourself like, what's the goal for the money? And that is still now the most single helpful question. You know, if I'm a passive investor and I'm sitting there like looking at asset class versus asset class property, A, property B market market, whatever, investors in myself included, we tend to jump straight to asking like, Oh, how do these metrics compare? And in the end, it's like, Well, have you even answered the more fundamental question that's more potent in my humble opinion, which is like, what's the goal for the money man? Because all day, every day, I mean, I talk to new investors and repeat investors alike who succumb to shiny object syndrome and they also lose sight of their goal setting, you know, and they'll say, Oh, man, that deal's got great cash flow. And it's like, Cool, What's the goal for the money? And they'd be like, Well, I'm really looking to grow it. And you're like, Well, that's the opposite of what you just said you want on this deal, right?

Sean de Martel: [00:27:48] Yeah. Because then I would say IRR would be the metric you should be focusing on because it takes into account the time value of money and if you want to grow it.

Spencer: [00:27:55] Yeah. And it sounds fundamental, right? But I do think that like when you get around and you talk to, you know, you and I are connecting today, you've got this incredible experience moving out of your career and building this firm and, you know, acquiring assets and improving them across the country. Like you're surrounded with people who are intelligent and experienced, and we all tend to sometimes trick. Ourselves into thinking we can skip a step and skip a step is actually pretty dangerous. It's like if someone wanting to go get cash flow with a deal from me, something that is like a more stabilized value add thing, triple net, whatever, or are they wanting to go and actually grow it and do something that's more like development, more like heavy value, add more like something totally different. And so not to go too far off on that tangent, I just want to make it clear that sometimes it might sound simple and more fundamental, but ultimately more potent to go back to basics on what's the goal for the damn money?

Sean de Martel: [00:28:42] No, I'm glad you went on that tangent because that brought up a lot more questions and great points because like you said, it's not always just about the numbers, like for many reasons, right? There could be a, you know, really attractive assumptions on what the returns will be. But at the same time, like, you know, where is the asset located? Is it in an area where there is a lot less risk or higher risk? So, for example, is it in a tertiary market where the renter pool is smaller, rent growth is going to be a little more flat? Or is it in a primary market that's got a crap load of in-migration where these projections are looking, you know, pretty moderate, maybe conservative, but because there's so much in-migration, there's the potential to get a huge pop on those rents over the next five years. You know, things like that are to consider. And I think a lot of people to have gotten heard this word cash flow and heard about people retiring off of the cash flow that might think, okay, I think that I want that to be my goal. Well, you know, if you're getting a 6 to 8% cash flow, it's going to require a substantial amount of investment in order for you to be able to live off of that money. And I think some people don't really think that part through because they invest 50 or $100,000. And if you're getting 8% of that, you know, you're over the course of a year, you're going to need to invest quite a bit more. So I think that there's so many things to take into account that are outside of just what's our exit IRR calculation and how do they underwrite. So I think that that's just a really great point that you brought up. And yeah, what do you want this money to do, I think is a great question.

Spencer: [00:30:12] Yeah. And I know we're hanging on this for a second as a topic, but like what you just said, gosh, that's been a really great topic. Even at dinner with Friends recently, you know, like as we've gone through this journey, it's a remarkable you probably experienced this, but you go off and you put your head down and you are grinding to build something unique and effective and adding value back to others in the world. And maybe that's a business. You do that for years and no one really knows that you're working that hard. No one really even cares, like, frankly, and that's fine. But we go buy a new house last year, suddenly everyone's like, Whoa, you guys are Where did this come from? And we're like, Well, I've been doing this for like six years. You know. I'm working like a dog.

Sean de Martel: [00:30:53] A lot of. Sacrifice. It's not like this was just popped up.

Spencer: [00:30:56] Right? And so and I'm not faulting this. You know, this is a natural human thing. It's right in front of them. They see a bigger house, all that stuff. And it's like, well, now the question has come up. The question is coming in fast and furious. Like, we want to do what you guys did. And it's like, Well, cool. Do you want to go build a business? Well, no. Spencer don't want to go build a business. Hey, cool. I get it. You have a great job. You make $400,000 a year W-2. I'm not making this up. You know this West Coast tech company money, W-2, single income. Yeah. Then the next question is, Well, cool. What if I want to do it passive? Be like, Well, do you have $5 million to invest? And that's not a facetious number. That is not trying to be inflammatory. That is just a the math behind the same ranges that you just described for cash flow projections from a deal. Right. It's like if we're just using raw assumptions, I'm not trying to be antagonistic, but like that's the question is like someone wanting to buy income streams aka passive income, or they want to build income streams, meaning build a business. And so, you know, I just think it's a really helpful regrounding for a lot of folks when they hear back to cash flow, why does a person making $400,000 a year at a job need cash flow now? I'll leave that to them to think about, right? Because ultimately, if it's tied to a purpose, maybe they want to go have a five year pivot out of their day job. You know, maybe they want to go build a stealth startup. These are real examples. And if that's the case and they want to start building those income streams now, those are great reasons, but if they are doing it because they think they heard cash flow somewhere and they want cash flow because they're not sure why. Pause. Hit pause. Man Yeah, hit.Pause, revisit goals and check the bank account because I don't know many people that have $5 million sitting around to go get a full 200 to $400,000 a year cash flow, comfortable. Passive.

Sean de Martel: [00:32:40] Has there ever been a situation where you were discussing this investment class with somebody who was interested in maybe passively investing, where you told them that you don't think that this asset class would be the right fit for them or maybe them investing their money didn't make sense many times.

Spencer: [00:32:54] And thank you for asking that. I'm sorry for interrupting. It's just I don't think anyone's ever asked me that before in a context like this, you know, with you and I in speaking in front of an audience. And the answer is absolutely.

Sean de Martel: [00:33:05] I have to I've actually told investors that I didn't think that my deal made the most sense for them. I've had to do it because they said, Oh, well, you know, we really wanted. To get X amount of cash flow on annual basis. And I want to under-promise over perform. So I told them like, I don't think this deal, this deal isn't really a cash flow heavy deal. You're going to get all that pop at the end. That's right. So setting those expectations I think is important, too. But yeah.

Spencer: [00:33:28] Well, gosh, that's a great example. And you know, want to set this expectation clearly with folks and with some context that like when I started this journey and started nerding out and buying rentals, you know, I was at what many, many folks out there might already know, which is like what it means to be an accredited investor, right? It's just an SEC term. It's a guideline. I didn't make it up. You didn't make it up, Sean. The SEC made it up many years ago. It's super outdated and like it's being revisited, yada yada. But I bring that up because ultimately we made a really hard decision back in 2020 to start only taking accredited investors for our group. And that wasn't because I didn't want to is because I got registered with the SEC and FINRa and they require me to. And now when friends or people in my personal network or just really amazing, hard working folks that are earlier in the journey reach out and they say, I can't believe you won't let me in your deal. My question back to them is like, why is this the right 50 K for you to drop in right now? Man, that's a lot of money. Like that's an emergency fund for a person. You know, that's and I'm not a financial advisor. This is not tax nor financial advice. I'm just simply saying back to round this out a little bit for folks. When folks say, hey, I really want to join this deal, what's the goal for the money? What's the goal back to what's the goal for the money?

Sean de Martel: [00:34:47] Right. I want to get a good nugget before we go towards the last part of our show here. I wanted to and sorry to put you on the spot with these, but maybe give us like 2 or 3 more questions or maybe even just red flags to look for when someone is looking at a sponsor, looking at a deal like give us a couple just little nuggets of advice.

Spencer: [00:35:09] Yeah. And not feeling put on the spot at all. Man, I live and breathe this stuff, so when talking to a sponsor, I would ask about specifically like walking through their team, like who's in the lead sponsor team and how do they work together and what are the roles, scopes of roles that they hold in the company. For those that are in the corporate world, W2 world, you know, you're going to see this in a more dry corporate way of just scopes of responsibility, right? But like, are there great sponsors out there that don't sit down and say, oh, we have three lead sponsors in there. One is the CEO, visionary is the money man, and one is the construction acquisitions guy or gal, right? Like once in a while you'll find those things where it's that cleanly cut, but it's still worth asking. It's still worth understanding and it's still. And why? Because that is a marriage. It's a business marriage. You need that team together and you need that team planning to be together for years. So I would just say that you want to dig into that and understand like, how did they meet? Why are they working together? What are the roles and responsibilities? How did they decide what those would be? You know, and I'm saying them in a very direct way right now. So like it's not like I'm sitting down, they're grilling the person on the phone like it's an interview. But you got to know one more nugget I'll share. There is when it comes to, you know, financial transparency and updates, like you made some awesome commentary earlier on this topic, Sean, which is like if someone is already in deals, they have investors that they're serving in deals, I'm sure that they can provide examples of current communication on deals and so asking them to see. You know, like. Like, hey, can I see an example of a monthly update or quarterly update from at least 1 or 2 projects that the team is already in right now, making sure that they can actually see that because financial transparency should be table stakes.

Sean de Martel: [00:36:57] I love that too, because so I always offer that to to, you know, a new potential passive investor. And I like to even offer to them like, yeah, you know, if you want more of those I could just put you on the list to get those every single time we put one out about that asset. I have no qualms about that because I think that that transparency, it's lacking. Let me back up. One of the things that I remember very strongly from the Navy was how easy it was to set yourself apart, to get to rank up quicker, find what other people aren't doing or don't want to do, or something that you could do better and then go and do that thing better. And so, you know, I've canvassed and scraped so many different operators out there and gotten on their list to get email updates and newsletters and things like that and learned about, you know, what they're telling their investors. Et cetera. And I've just thought to my head with every time I'm looking at those things, okay, how can I do that better so that I can impress and attract and grow that trust with a potential investor. And I think that these are like all of those things. If you're listening to this podcast right now and you're hearing Spencer talk, these are all things that if you do it and you do it well, you can set yourself apart from another sponsor even if you don't have as much experience, I promise you totally. And like Spencer said, even if maybe the sponsor is lacking something, like maybe they don't have the track record or maybe they don't have this or that, there are ways to make up for it. Yes, and I'll end this by saying one more thing. One of the best ways, by the way, to do this is to put your own damn money in the deal. You know, there's no better way to show Spencer or somebody else how much you're invested in the deal other than investing your own money. And I think a lot of sponsors out there don't do that. People come on my show all the time and say that they don't. So I think that that's another great way and something that I would even ask sponsors that you might be investing with.

Spencer: [00:38:47] There's so much wisdom you just dropped right there. You know, think like skin in the game as it were, is a must. That is actually one of the hard criteria I didn't talk about earlier, but didn't want to bore people with too many bullets. But you have to like when people come in, they're like, oh, you know, what about skin in the game? Like 100% of the real estate deal is the sponsor has to have skin in the game.

Sean de Martel: [00:39:06] Yeah, I think.That that's a great criteria. And if you're a sponsor listening to this, I understand one of the thoughts that might go in your head because it went in my head is I can't afford to invest 100 grand in every one of my deals as I'm growing this business. I think that's okay. Personally, even if you could put 20 K and 25 K, that's still a substantial amount of money. You know, it's showing that to the investors. And I've even shown one of my investors before like, Look man, I'm putting in 25 K This is as much as I can put in. I'll show you, I'll show you this account here. This is a good chunk of what I have as liquid capital. Doing stuff like that early on I think will impress them a lot. Not necessarily in the amount of money, but you're coughing up a huge chunk of your savings to join in on that deal. So if you're listening to this, I promise you that's huge. That's so huge. Spencer, I want to get to the last part of our show where we ask those same questions. We ask everybody. So the first one I like to ask always is if you could go back and tell your 25 year old self one piece of advice, what would it be?

Spencer: [00:40:04] Be more curious, you know, and to elaborate briefly, be more curious about the people that you work with in your company or in our 20s, we all tend to be a bit more self-centered. Generally, I was and I look back and I'm like, Man, those relationships in that company and that company and that company that could rattle off so many names of people where I'm like, Man, I was in too much of a short term transactional mindset and those could be long term relationships and friends, you know? And that's really what life's about, is like building those types of partnerships and relationships over years. And curiosity stems into everything, man. Like how we focus our time and attention to build skill, to build our knowledge, build our expertise, you know, and are we just repeating the same skill development over and over daily with our job, or are we actually honing something that's new or are we are we willing to go and fall flat on our face and try something completely outside of our comfort zone?

Sean de Martel: [00:40:58] And in today's day and age, all of that knowledge is at our fingertips for free most of the time, like learning that new skill, being curious, like if you want to know more about everything. Spencer and I just talked about 100% of all of that information is available on the Internet for free podcasts, for free books, for cheap. Unlike any time before in the history of the world. You can be curious and learn more about this stuff. So I think that that's a great point.

Spencer: [00:41:23] 100%. It's all available, man.

Sean de Martel: [00:41:25] So it's funny because I think we just answered the next question, which was going to be, how would you recommend others obtain the knowledge to go get started themselves? Do you have anything you want to add?

Spencer: [00:41:34] You know, I would just say begin with the end in mind. As a guy who did read 24 books and in 18 months, I would say that was not necessary. So it takes a balance. That was procrastination after book 3 or 4. You know, so in the pursuit of knowledge and the pursuit of skills, Sean, I'm sure you could tell your own stories and we could go back and forth on this one. But I'll just say that we all learn best and I learn best when I'm forced to get in front of another human being like we're talking right now and speak with reasonable clarity about something I claim to know. And until I can do that, I don't know it. So getting out into the meet up when I read books and then I had to go out to a real estate meetup. Scared to sound like a dumbass, in which I did at times. And then someone says, Oh, what do you mean by that? And then you're like, okay, now I'm learning, right?

Sean de Martel: [00:42:27] Man, I could speak on that too. For so long on over the years trying to learn and then grow this business, starting this podcast early on, doing my first deals. You know, I looked stupid in so many ways going back always like, like remember my first conversations with some of my first passive investors and thinking back like, Oh man, that was terrible how I handled that. Or I fumbled on this question. But if you're listening to this, you got to get past that fear because Spencer and I both had it. You're going to have it. I mean, that's just how it goes. Just like if you're starting a brand new job, no matter what it is, you're a little bit nervous whether or not you're going to pick it up, how are you going to perform? It's just part of it. And you'll look back and just be happy that you got past that fear and kept growing. I mean, even today I'm learning more and more about this business, so it's just part of it.

Spencer: [00:43:15] Imposter syndrome hits the highest performing people in the world for every single walk of life. Actors, athletes, politicians, whatever they all get, they all get it.They're human.

Sean de Martel: [00:43:23] Exactly. Spencer, how can our listeners get in touch with you? Maybe if they want your services to help them vet some sponsors and deals?

Spencer: [00:43:31] Yeah, we have a website, MadisonInvesting.com, so folks can go there, fill out a quick form and set up a call with me and kind of join our club.

Sean de Martel: [00:43:39] Awesome. Spencer, thank you so much for coming on the show. Man, this was a really great episode. You had all kinds of great insight that we haven't gotten from passive investors before. So thanks again. And on behalf of myself, Mike, the whole real estate takeoff team, thank you all for listening. We will catch you on the next episode.

Intro: [00:43:56] Thank you for listening to the Real Estate Takeoff podcast. For more information regarding anything real estate investing related, or if you'd like to subscribe to our newsletter, visit the real estate takeoff.com and be sure to follow the show on Instagram at the real estate takeoff. See you next week.

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