The debate between passive and active investment is over before this episode even began. Hunter Thompson, a full-time real estate investor and Founder of Asym Capital, a private equity firm based out of Los Angeles, shares where he focuses his investment and why he favors passive investing. Showing where to start as a passive investor, he also offers some tips on how to use leverage and diversify as a passive investor. Not everyone may like passive investment and may choose other paths, but for now, Hunter is perfectly content and satisfied with his choice.

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Passive Vs. Active Investing For Financial Freedom with Hunter Thompson

On this episode, we’ve got something very exciting. I’m sitting down with Hunter Thompson from the Cash Flow Connections Podcast and Asym Capital. That’s a private equity firm based out of LA in California where Hunter lives. Since starting, he’s helped over 250 investors allocate their capital into over a hundred properties. He’s raised over $20 million from passive investors investing in over $60 million in commercial real estate. He specializes in self–storage syndications, which is an important interest of mine. I think it’s great. I invest in it passively through my self-directed IRA. I think it’s a great route to go. 

We’re talking about active versus passive real estate investing and which of those two is better for creating financial independence. He is uniquely qualified to talk on this topic in addition to his background in investing, running his whole company and hosting his podcast. He also debated this topic live onstage in 2019 at the Best Ever Conference in Denver, which is hosted by Joe Fairless and a bunch of other guys. I’m especially excited because I missed the 2019 conference. I’ve been in the other ones but didn’t make it to that. Anyway, without further ado, Hunter, thanks for joining us. 

I appreciate for having me on. Thanks again. 

I’m excited. As we get into this, which is your position on the active versus passive? Which is better? 

I’ll be honest with you, I have focused on the vehicle of passive investing since I understood the structure. I was very fortunate in the sense that as soon as I understood what syndication was, as soon as I understood that you could invest in such a way that relies on someone else’s time, energy and expertise and access to capital, I found that so compelling that I built my career around that. To be transparent, I don’t just sit on the beach and watch the money come in. I built my career on passive investing and facilitating passive investing, but you don’t have to build a career around it. In terms of portfolio allocation, I think it’s incredibly prudent to consider it at least for a portion of your portfolio. I’m overwhelmingly on the side of passive investing so much so that without trying to move the goalpost into the debate, I basically said in my opening five minutes, “I’m a little surprised that this is even a topic of conversation despite the fact that most of the people in the audience disagreed with me.” 

We have similar positions on this, if not precisely identical. This is Passive Wealth Strategies. I’m primarily a passive investor. I do actively invest as well but the deals that I actively invest in, I’m primarily just placing my capital and the capital of others. I believe in the passive side as well. Our discussion, I don’t think it’s going to be a debate. I’m not that good of a devil’s advocate on this topic but I’m definitely interested in hearing about what you learned and your points in the debate as well. In getting into passive investments, can you give the listeners a little bit more of a background? Fill out the background, what do you do with Asym Capital? 

Just a little bit about my personal background. I went all in on financial assets right when 2008 happened. From a personality standpoint, I felt like there was going to be a tremendous opportunity in financial assets, stocks, bonds, mutual funds and real estate, you name it just because I had learned a little bit about economics. Naturally, I’m very inclined to go left when people are looking right. Especially when I was younger, I go left when people are looking right. Even if that meant going left before looking myself, just because I assume that everyone’s wrong generally speaking. As you get older, that starts to become more moderated, but at the time it was incredibly advantageous. When I started doing that though, stocks were the thing that were most applicable or most accessible because that’s the thing that has the most marketing behind it and that’s the thing that most people are most familiar with. 

I started to invest passively in stocks and had success with that as most people would starting in 2008 but had a last straw moment in 2010 when the European debt crisis started creating unbelievable volatility in my United States–based investments. I basically said, “After all these books that I’ve read and all these blog posts and articles I’ve read by Warren Buffett and all this research I’ve done, how is it the case that the German bond yields are playing a significant role in my financial well–being? How could I possibly have predicted that or mitigated that risk and what are we even talking about?” 

I basically went out on a route trying to find an investment vehicle where either a small family office or an individual person or a small company can actually conduct accurate due diligence to mitigate risks. As your audience are most likely not surprised, I was quickly led to real estate just because the relative simplicity of the asset and the asymmetric return that can be generated if you know how to identify great properties. My strong suit was not in identifying great properties but being dedicated to creating a due diligence process focused on the sponsor themselves. That’s when I started to have success as a professional and started to build a business and started to scale that business based on that investment basis. 

I absolutely agree at least with what I think you’re implying is that the sponsors are a very key part of these deals. As passive investors, that’s where we need to get started as we’re getting into looking at deals. Whether or not we want to go down that path right now, that’s a whole other can of bees that we can open up and talk about. As far as passively investing versus actively investing, when I think about this, I think the common answer that you’re going to get if you talk to real estate entrepreneurs, primarily real estate investors, they’re going to tell you active investing is the best way to go. The room that you were in when you were debating this topic was primarily people who are active investors. Many of whom have obtained some level of financial independence if not complete financial independence through what would be considered active real estate investing. Whereas, for the rest of us, a small single–family office or someone with few nickels to rub together that are looking to invest and create that financial independence. Why is a passive route better than an active route for the typical person out there or a high–paid professional that has a good job and doesn’t want to leave the job but wants to start growing that wealth and eventually be out of the position where they have a job? Why is that the better way to go passively? 

Now that the debate is over, it happened and I don’t have to worry about the audience or moving the goalpost. I will say that depending on how you define financial freedom, I would make the case that it’s actually the only way to achieve financial freedom. My definition of financial freedom is the mindset that goes along with knowing that all of your future expenses can be paid off without you needing to work. The reason I phrased it like that is I’m towing the line of defining it as being a passive investor because that’s truly how I believe what it is. The key thing there in my opinion is the mindset that goes along with knowing that you’re going to have that because this is why the tie into net worth, which is clearly much easier to acquire being an active investor is not tied to financial freedom. 

You can have a $1 billion net worth but if it’s all overallocated to one asset class, you can be completely wiped out and therefore constantly worried about that. Therefore, your financial freedom, you can be incorrect and know that you’re going to but if that predictability of outcome is reduced to zero because you’re overallocated, you have a major problem there. By the way, this is not uncommon. The division of labor is one of the most powerful things in all of economics. In order to have an upper hand in business, especially a significant upper hand where it’s going to generate you significant net worth, you have to be hyper–specialized and focused. 

This is how you get economies of scale. This is how you get relationships and everything that goes along with being best in class at one particular thing. When you’re best in class at one particular thing, it’s antithetic to financial planning. That’s antithetic to diversification and therefore, it’s antithetic to the predictability of outcomes. You can’t know that you’re going to be able to pay off those expenses without having that diversification. To put a fine point on this, I think the most pronounced version of this is Eike Batista. Eike Batista was at one point the seventh richest person in the world and now hopefully everyone in the audience has a higher net worth than him. Because over the course of about eighteen months, he went from the seventh richest person in the world to negative $1 billion net worth and there you go. It doesn’t matter how much money you have or how much better you are. If you’re a market mover and in a major asset class like oil, which turned around drastically, they caused to create a tremendous financial ruin and put himself in a position that you could easily be avoided even if a third or a tenth of his net worth was invested in the types of investments you and I are such a proponent of. That net worth would grow and grow for the next 60 years and generational wealth could be easily created from that. 

To boil that down maybe a little bit, part of my interpretation to what you’re saying is a passive investor is earning a return in your definition through the placement of their own capital exclusively just through the placement of their own capital. Ideally, through more of a cashflow vehicle than a price appreciation vehicle like commodities, stocks or something like that. A cashflow vehicle like commercial real estate syndications that we do, if you’re making cashflow, it’s not all about price appreciation. Am I reading through between the lines well on that? 

That’s certainly part of it, but I’ll put it to a finer point. The key is diversification. The combination there is that some of your investments should provide that cashflow. Some of your investments should provide the outsized returns from capital appreciation but if you overallocated to any strategy, even if you overallocated your cashflow, that could give you a problem later down the road. I’m a huge proponent of cashflow but if you’re trying to get both the predictability of outcome and the outsized returns, generally speaking, the predictability of outcome comes from the cashflow. The outsized returns come from capital appreciation, meaning forced appreciation. It‘s hard to get all of the sectors of an investment portfolio if you’re only focused on one particular strategy. I can go into the details as far as why I’m not even though I’m only focused on the passive approach and why the fact that I do have a market advantage despite being invested in multiple asset classes, we’ll save that for later. The point is you can build a portfolio like this without being a specialist in everything that you’re investing in and still have a market advantage through the leverage of other people’s time, energy and expertise. 

That’s why I’m involved in this business as well. I get to invest alongside people that are better at organizational operations than I am, better at business intelligence than I am and better at talking to brokers than I am. Better at doing all of these activities that either I’m not good at or I’m not interested in being good at or I don’t have the time to be good at. That’s why I’m in this business but when you talk about diversification, how do we decide how to diversify? Because the common answer that the average person’s going to get is just buying an index fund. If you want to diversify, buy the S&P, maybe some bond fund or something like that. As passive investors, why even look at a cashflow/value–add type of real estate opportunity or syndication versus the S&P over time on the cost average? 

I would say that for most of the audience on this show, you’re probably sympathetic to number one, dealing with your family members asking that question all the time. Number two, you’re probably compelled by this anyway, but I would do this honestly without even doing any data analytics or you mentioned business intelligence or machine learning or anything like that. Write down what you genuinely think the chances of a loss of principal taking place. Write down the expected outcome of those returns. It’s not an algorithm. It’s just looking at it saying, “What’s the likelihood of this?” I’ll give you a perfect example. The world of due diligence right now on a multifamily workforce housing property that is in a market that has historically never been under 80% occupied, the property is currently 92% occupied. The current owner has 100,000 units and is not paying attention to it at all. The expense ratio is about 62% meaning that of every dollar that goes in, $0.62 is going to expenses. That’s completely out of whack. It should be way less than that. My point is the breakeven occupancy of this property is below 70%. It’s 92% occupied in a market that’s never been below 80%, the breakeven occupancy is 70%.  

When you look at the likelihood of loss of principal on a risk–adjusted basis, it’s hard to come up with a way that can be historic. It would be very ahistoric. Why is it compelling? Because if you’re looking at things like you should be on a risk–adjusted basis in the sense that everything is probabilistic, cashflow generally and niche real estate investments put themselves far above and beyond. The other question one level deeper than that is, “Why shouldn’t I just do this myself?” You’re saying self–storage is so compelling. I’m reasonably business–savvy. Maybe I went to law school and I have the upper hand just because I can create my own legal documents or something like that. 

By the way, many of our investors are extremely business savvy and many of them are even active owners themselves. Going back to the division of labor, when all you do is own self–storage facilities. Let’s say you focus specifically on self–storage facilities in Florida, there is a huge difference between owning twenty self–storage facilities and owning twenty single–family houses. When you own twenty self–storage facilities, you have relationships with brokers, relationships with sellers and relationship with lenders. You have business relationships with nearby universities or truck rental companies or economies of scale from insurance providers. There is a massive advantage that you can bring to the table so much so that you can make up for the fact that a sponsor may be participating in the interest of that deal.  

Then, things become very fascinating. When you’re getting up into these complicated asset classes where a sponsor will stand to gain or lose millions of dollars, all of a sudden you have someone who is highly incentivized to actually execute for you. The level of sophistication, meaning what they’re bringing to the table is extremely pronounced. If the return profile is similar and the time component is completely eliminated and the risk of being liable for something that goes wrong at the property level is eliminated, which is the case for passive investors, you’re starting to paint a picture of, “Why isn’t everyone doing this?” That’s what I started saying in 2011. There’s been a massive run–up in the popularity of these investments and not because of me, but because of some regulatory changes and because access has increased. 

We don’t want everybody to do this anyway. It’s more fun if not everybody does it but I agree with you. I’m not a single–family house investor, but if you’ve got twenty single-family houses and a day job, you’ve got two if not three jobs essentially. You have your day job plus all the time running that real estate business. If you’ve got management, even then you have to manage your managers and handle all your bookkeeping and all that stuff and there are ways to run that business like a business. For somebody to go with your lawyer for example, think of a friend who is a Harvard–educated lawyer and works in DC. She works probably anywhere between 80 and 100 hours a week at her job and she makes a lot of money. There is no way does she have the time to buy a single–family rental property because she wouldn’t have the time to dedicate to it. Never mind DC being a probably not great market to invest in. In cases like that, I agree that passive investing makes a lot more sense plus the mitigation of risk. 

We have a question. “For passive investors, how can you use leverage?” I’m going for a home example, but the scale of properties that you and I deal with here going to be a couple of extra zeros on here. If your typical home has $100,000, you can put down 20% and borrow the remaining $80,000 from a bank. Therefore, you’re controlling $100,000 worth of property with just your $20,000 down and your settlement costs. As far as passive investors and syndications, for example, we can expand the syndications using round numbers, how do they use leverage? 

This is a great question. This is actually one of the most compelling things and I will say, the people that we’re debating against at the Best Ever Conference, both of them are highly experienced sponsors and we got along and we were complimenting each other in terms of the debate that we were bringing forth but also in terms of our track record in the business. However, there was one moment where things got a little heated and it’s because I made a comment. I was making a joke about the fact that it’s just a matter of opinion whether which one’s better. I said, “It‘s just a matter of opinion. For me, it’s the passive approach. If you want to be diversified, then that’s what you do. In the active approach, if you want to put all of your eggs in one basket and sign away your first–born children on a personally–guaranteed loan, then the active approach is good for you.” 

The reason I said that is because as a passive investor, I rely on the sponsor’s ability to access credit. Many times, if we’re talking about a $25 million loan, I can’t get access to that because my track record is not what theirs is and I don’t have a balance sheet that what theirs is. They may have $25 million liquid in a bank account that they have to show in order to get access to a $25 million loan and the other people that we were bidding against mentioned, “These are non-recourse loans,” which is a very fair point except for the fact that, “Why do you think you have to show you how to $25 million in there?” Because there are clauses where that non-recourse becomes recourse and some of those clauses can be things like, “In the event of a default, it becomes recourse.” 

Let me restate that, “In the event of a default, it’s a recourse loan.” Meaning that the only time it matters, it’s a recourse loan. I don’t know the details of their particular paperwork but they were like, “It is something that we need to make sure I’d call our attorney to make sure that’s not in our next documents.” However, my point regarding the access to credit to your question, we rely on the sponsors to do that and we’re not at all involved in this. You’re getting the ability to leverage their access to a $25 million loan to buy a $50 million property. All of a sudden, you’re an owner on a $50 million property without the liability that goes along with that massive loan. 

The deal I just invested in with my IRA, the sponsors, they had to put their name on the loan and frankly, I’m not sure at this point whether or not it was recourse or nonrecourse, but they have to put their signature down saying, “I’m going to repay this loan one way or another,” and there are always clauses in there. 

It’s not some random LLC like me as a person. I’m going to write this my name. 

Their name is on the line there, their given name or whatever their legal name is. Whereas, we as passive investors are just members in an LLC and for me it’s even further away. It’s in my IRA it’s not my money for another 30 years or something like that. 

The liability is limited to your investment amount. They will not pursue you above that. You can lose your investment amount, that’s one thing, but you’re never going to get a bill saying so-and-so has claimed that you made an unsafe work environment for him and now he’s coming after you. 

I think it’s important to clarify or reinforce what you said in the Best Ever Conference. It’s a good time. Everybody’s all friends. It’s fine. It’s all good. We don’t need to bring any names up for the folks that were on the stage with you. 

Actually, I don’t remember one of them but another one was Mark Massey and the reason I’m saying that is they know what they’re doing. During the debate, I said, “You are absolutely the kind of sponsor that I would want to make a bet on.” It’s very clear from the conversation so I don’t mean to throw them under the bus. It’s more like they’re the skilled ones. I’m just the one that’s come to the table with the passive investor approach. 

Mark from Massey Development. He’s a great sponsor. I totally agree. Another very important point is that many of these sponsors are actively investing. When they make a return and they have some capital, they don’t just sit on it. They don’t just put it all in their own deals. They go and passively invest in other sponsors deals. It’s part of relationship building, part of diversification and getting into other asset classes. I think that speaks volumes for the importance or the validity, the value of passively investing when you have people who are some of the best active investors in the business doing it now are also passive investors on the side on other people’s deals. 

Exactly and I love dealing with sophisticated investors. That’s our brand. Our podcast is extremely dense and we have to answer tough questions and most of our investors are investors in multiple asset classes as opposed to talking to investors that may or be considering investing for the first time. Which by the way, nothing makes me more excited to do that because I like helping people get money on the stock market. The question becomes though, if you are a sponsor and you have a particular niche and all your properties are A-class properties in Southern California. You want exposure to someone who has a national outlook or looks particularly in the Midwest for example, that’s not your area of expertise. You can leverage the skillset of someone else’s focus and their division of labor for your own personal portfolio. In my opinion, that’s the only way you get the best of both worlds. You get that diversification but you still have that division of labor, which results in all those great things that I mentioned, economies of scales and relationships. 

We’re going to take the other spin. I’m going to ask you to be fair, what is a counterpoint that the other side could make that your active investing is better if that’s the position you’re taking and you steel man their argument? What is the best point that they could make against what you’re saying or what we’re saying because you and I are in agreement on this? 

I think it’s very reasonable and also something to take note of which is that the passive approach is not for most people the way to make money, but I think that there’s a misconception that making money makes you financially free. That’s the first thing that I wanted to address. If you are a sponsor and you’re able to create, “I flipped a property and I made $300,000 in two years,” which is a reasonable thing to do as a sponsor of high–end property. That’s not going to be a story of when you invested $25,000 in syndication and got a check for $300,000, especially if it was cashflowing property. Your route to financial freedom starts where you personally are. 

If you are in pursuit of becoming an accredited investor for example, you need to create the path of least resistance to accomplish that goal. Once you start being able to invest on the side, you’re building up the approach. What I’m alluding to is a hybrid approach where you do have a way of building up that net worth and simultaneously allocating that net worth is the way to get that knowing that you’re going to be okay type of situation through diversification. Also, getting that network to where you need it to be so that the investments you can make are significant and can therefore provide cashflow to pay off your expenses. 

We’ve got another awesome question. I’m excited about this. You‘re going to love this one. “Passive investing is definitely something everyone should do at some point in their investing career. If the goal is financial freedom, then the rate of growth essentially is key and it makes sense. You have to get there somehow. Active investing gets paid five ways, appreciation, cashflow, loan, pay down, tax benefits and inflation hedging in a way. How are passive investors getting paid other than cashflow?” I’m sure you’ve got answers for this. 

I get a lot of questions about the fact that, “I don’t like to invest in passive deals or I don’t like to invest in funds because I don’t get one of the benefits of investing in real estate which is the depreciation.” This is a bit of a misconception. Operators, including companies that are positioned such as myself, we have the ability to pass through depreciation to our investors just as if owning a property. In our deals, for example, you own interest in LLC and you own the proceeds of that LLC proportional to your investment amount. If that LLC owns a property and there is $10,000 of depreciation that comes through to that property, we pass that depreciation onto investors proportional to their ownership of the LLC. That’s another way you can get paid. That’s usually not that significant in the risk profile and the asset classes that we look at. We usually get a net negative K-1 but it’s not something to write home about. It’s basically enough to defer paying taxes for that year’s cashflow but I just wanted to clear that up. Is it how else can passive investors get paid as opposed to just cashflow and appreciation? 

The active investing examples are appreciation, cashflow, loan pay down, tax benefits and inflation–related hedging. How are passive investors getting paid other than cashflow? You’ve identified though a way what they get paid by a depreciation so you could quantify that as a tax benefit. There are other tax benefits as well. What about appreciation, loan pay down and inflation hedging? 

Basically, my reference to that with depreciation is that it’s a private transaction. You and the sponsor you invest with, they can pass through all of the benefits if they see fit and it’s the industry standard to do that. What I mean is that it’s the industry standard to pass through appreciation. It’s the industry standards you pass through depreciation. I’m not trying to get down into the weeds because this is what I do professionally but I will say that if there is a sponsor out there that said, “This particular deal, the sponsor is going to keep 100% of the depreciation,” that would just be up to the sponsor to make that call and I’m not saying that you shouldn’t read your documents, but that would be not within market dynamics basically. It’s standard to pass through every one of those benefits. 

The market has found a lot of equilibria with what investors will accept and what sponsors can offer in terms of either equity splits or projected returns to investors or what have you. Those are all very detailed and case–dependent and all that stuff but investors are always looking out for their benefit and then on the other side, that’s why we always vet sponsors ahead of time. Before I even look at the package, I want to know, do I like the sponsor before I even consider the deal. 

We basically aren’t working with new sponsors, just given what’s going on in the economy and our relationships that we’ve already built up. If I have a company that I’ve worked with for three years that has a tremendous track record prior to us even meeting and there’s another company which is comparable, I would go with the company that has already built a track record with nine times out of ten. Given that we’ve been fortunate in the timing of when we started the business and the fact that there was a lack of liquidity in there and the fact that we could write large checks, were able to build some amazing relationships at a time when people needed capital. While we do have an extensive due diligence process which is focused on the sponsor, at this point, it’s re–facilitating those original relationships that we curated eight years ago. 

There’s another one I think we need to specifically address because the question was a little bit pointed toward single–family investing, which is totally fine but what you and I do is commercial. He mentioned appreciation and the deals that you and I do, we’re doing forced value–add appreciation. It’s not the same way that you get appreciation in a single–family investment. I don’t doubt that you would characterize it that way, but would you care to add your position on that and then expand as you see fit? 

I think one of my favorite examples of this is particularly the self–storage business. There are tens of thousands of self–storage facilities in the United States that do not have any relationship with a truck rental company whatsoever. We can buy properties based on in–place income and then the day after the close, call our contact at U-Haul, have them park fifteen trucks on our facility that they own and then rent those trucks out to tenants as they move in and out and get a commission from U-Haul for facilitating the transaction. I’d say we, I mean in conjunction with the sponsor because I’m not directly interfacing with U-Haul but I have personally invested in deals where that one-line item has gone from $0 a month to $3,500 a month directly to the bottom line. It just wasn’t a strategy. They weren’t implementing it and now they are. If you multiply that by twelve on a monthly basis and then divide it by seven cap or so to be conservative, we’re talking about $600,000 of value–added to the property by just implementing the strategy. 

The name of my company, Asym Capital, is short for asymmetric. When I look at things on a risk–adjusted basis, I’m not talking about expanding the facility. I’m not talking about taking a C-class property turning it into A-class property. Those are fine strategies. Generally, you’ll get a symmetric return for the risk you’re taking on but buying a property and implementing that management strategy of having that relationship with U-Haul, there’s no capital expenditure. It’s a matter of calling them up and those are the types of deals that produce that asymmetric return. We do invest in both, converting units and expanding properties but you get that bump in terms of the outsized returns by implementing strategies. Particularly as it relates to management strategies which are why I like those complicated asset classes. There’s more of them to do. 

The important thing to take away there to the difference between commercial and residential real estate and this is the end commercial including large scale multifamily, is that the value of the property is going to be a calculation based on the net operating income. How many dollars are you bringing in at the end of the year, not counting debt, not counting your mortgage versus the market capitalization rates? You used a 7% cap in that case. For every dollar that the sponsor adds to the net operating income that gets capitalized into the value of the property. That’s where you’re talking about that asymmetric return. We add a dollar to the bottom line, but we add significantly more to the value of the property based on the market cap. That’s a big advantage of commercial real estate in terms of the forced nature of appreciation. That’s a big strategy going on right now. 

There’s another one I’d like to add just because it’s a deal that I put it in my self-directed IRA. Another example, a sponsor came back and told us within the first month or two, there were many units that were running for maybe $20 a month at a self–storage property but the market rents were somewhere around $60 a month. Those $20 a month people were somebody that got a move–in special and because the original owners were then not as savvy, I don’t know. I don’t want to judge, but they never brought that particular tenant up to the market rent of $60. We go around, we normalize these rents. That’s how it’s done and that’s a huge opportunity that I see particularly if we’re talking about buying properties from potentially mom and pop operators. We’ve got another question here. You’re welcome to answer this however you like. Maybe it makes sense at this point to take the conversation offline, but what are the typical rates of return range for passive investing in a syndication deal? If somebody asked me that, I would say, “I can’t disclose that here. We’ll talk offline about it,” but you’re welcome to answer how you see fit. 

Every attorney’s going to fight over me answering this but I’ll just say generally speaking about what I found in the market place, this has nothing to do with our particular deals. I personally don’t like getting out of bed unless I feel it’s reasonable to achieve a low to mid-teens return. That’s what typical in the market place. If you download a hundred deals, they’ll most likely be in that low to mid-teens range. Take it for what it is because number one, everyone’s marketing documents are exactly the same. You have to be extremely savvy to identify which one of those will actually perform. Again, it’s not about setting expectations, that’s the market dynamic now. 

From my passive investing standpoint, I agree. I would add a few comments that it’s all projections and it’s all math. Back to vetting the sponsor, if it’s not an experienced sponsor, then their projection of a mid-teens return, that could be completely made up. I don’t know whether they’re qualified to make that projection into the future. 

Other than the spectrum, you can be like, “This is a development deal and the fact that it’s in the low-teens, that’s completely also outside of the market dynamic, not because they’re aggressive but because something weird is going on where you’re taking all the risk of development and not achieving something higher than the low teens.” You have to be able to review deals which is one of the great things about what’s happened since the JOBS Act, which is that you can. The problem though is just because you have access to them doesn’t mean that the education is there and that’s what you and I are doing. I feel like we’re both in this business to help people educate themselves to protect their principal. Because if not, then we’re just basically riding another wave of what happened in the stock market back in 2000 and we don’t want to do that. 

This business is a lot of fun too. It’s real estate investing for fun and profit. Another thing I would add at least from the multifamily world and you being in self–storage, you can let me know what you think about this but in the multifamily world, there are a lot of new or even moderately experienced sponsors and their underwriting is conservative. We do conservative underwriting, but everybody says their underwriting is conservative. It’s a buzz word at this point. What’s your opinion on that from a passive investor stand?  

Sorry to interrupt, this is something that obviously I‘ve built my career on because when it comes to the sponsor, every piece of our due diligence process which starts at the sponsor and end at the legal documents, there are seven stages there. Every single question I ask is focused on who am I’m making a bet on? Are they putting themselves in a position to deliver for their investors over the long term? When it comes to underwriting standards, it’s the exact same. One thing that I would say will paint a very clear picture is if you can get the trailing twelve–month financials and then look at the year one projection, and then identify the major changes between the two and ask the sponsor to justify those changes. You’ll get a very good sense of who you’re dealing with. A perfect example is if the operating expense ratio is supposed to go from 62 to 48, it is a massive difference. That doesn’t mean that the sponsor is being aggressive. It just means they need to justify it. 

A good answer would be the reason we can justify this is that wrench is a little bit of out of whack. We have a property three miles away, which has a 48% operating expense ratio and it’s the same vintage. Things like that start to build that case to make that very compelling. What you wouldn’t want to hear is, “The person at Keller Williams told me that this is what it would be like.” No disrespect to Keller Williams, it’s just that their reputation in the business isn’t to have accurate operating expense ratios. That’s not their area of expertise. Again, no disrespect, that’s the reality of the situation. 

You’re respective of the brokerage, “The broker told me.” 

Thank you for clarifying that. That’s exactly right. You want to have a clear understanding of market dynamics. If they have subject properties which are relatively comparable, that’s great, competitive assets which they have some insight into, those are great answers. That’s when the case becomes clear. I want to clarify, just because there’s a big difference doesn’t mean it’s not appropriate. It just means that’s what you should definitely focus your due diligence efforts on. 

I’ve got three rapid–fire questions for you. The first one, what is the best investment you ever made? 

I don’t want to hedge and then talk. There was a self–storage deal that I would always answer it and say this exactly right and it was an incredible deal and it did yield incredible return. I have to be honest and be transparent. We just got an email confirming that I think that it is now being replaced. When I look at things on their risk–adjusted basis, we brought a property in the Texas market that was just completely under rent and they were overpaying on everything. Everything from water, to pet services, to trash removal, everything was just out of whack from an absentee owner. We got the returns back and it’s ridiculous. 

I say ridiculous as in not replicatable over the next ten years because market dynamics would have to shift so drastically that it wouldn’t make sense mathematically for them to be able to do so. However, that’s not luck. In the case of the sponsor, it’s a result of them identifying the opportunity, identifying the market, identifying the team and being able to execute on the business plan flawlessly. In case your audience is interested and this is not a clickbait and this is not it’s expectations, but 39% IRR on a relatively stabilized multifamily property is crazy. That’s net–to–investors. It’s completely ridiculous. I say ridiculous in the sense of it’s mathematically impossible to have another 300–point cap rate compression over the next five years but, “Did it happen?” “Yes.” “Am I happy?” “Absolutely.” 

It’s a bit of a white whale type of thing. 

I’m going to have to be honest about that. 

Take your wins where you can get it and celebrate it. What about on the other side of that? What is the worst investment you ever made? 

I’ll be transparent about this. After I had some success in the business, I wanted to own real estate myself so I could control the time horizon. The easiest way for me to do this was to own single–family properties early in my career before I understood the benefits of syndications. I’m sure everyone listening to this has probably gotten a deal that says you can buy houses in Jackson, Mississippi for $30,000 apiece. You only have to put 33% down and you go three houses for a total of $33,000, that’s amazing. I’ll do it. They also rent for 2% of what they purchase. Say it’s $600 a month for rent and you can buy them for $30,000. I don’t even need to go into details because we all know how the story ends. You sell them for $60,000 after you bought them for $100,000 and that’s the worst investment I ever made. Part of the reason for that by the way, is because the smaller the purchase price and the smaller the gross dollars are, it doesn’t matter what the return is. If you’re getting $3,000 in cashflow and you have to go to the asset once and it costs you $1,000 to go, you’re not in a good spot. 

Furthermore, maybe even more importantly, you have a property manager who stands to gain someone in the range of $50 a month to $100 a month. Are they incentivized to actually keep the property rented or are they incentivized to say, “You‘re never going to believe this, but another air conditioning machine broke. It’s going to be $350?” They just nickel and dime you until you eventually quit. I know there were a lot of people that have made millions investing in single–family houses, but I continue to find that my personality suits best with dealing with people that stand to gain millions on each property. 

I find a lot of those folks that have made millions investing in single–families. For the most part, they don’t seem to be starting with a way out of state, low dollar figure type of single–family houses type of thing. They’re maybe buying in their own market. They’re buying over a longer period and they’re developing that at a very high level of sophistication by being in the business, working in the business and on the business at the same time. Then, they’ll start branching out into other markets so that again, they would have the savvy to see those three houses for $33,000 and say, “I’m not going to do that deal,” type of thing. That seems to be my observation based on those folks that had been successful in single–families. They tend to have a very long–time horizon and they’re very savvy operators, great business people. I know lots of people who have been successful in that regard. I can’t talk too bad about it, but it’s not for me. I’m not a single–family guy. I have no interest. 

I think to your point, there are so many people that have made millions but there’s also a larger sample size because most people have been most familiar with investing in single–family houses. I think that maybe there are very few people that say, “I started in commercial, it wasn’t for me. Now I only do single–family.” You frequently see the other end. That doesn’t paint the whole picture but at least it’s an important data point. 

I would be surprised if anybody went the other direction from commercial to single–families. I would be entirely coming the other way but you never know. I’m sure there’s somebody now that you pointed out. I’ll keep my ears open for that. My favorite question I ask here at the end of the show is what is the most important lesson you’ve learned in investing? 

I’ll shift gears a little bit. I’ve had the opportunity to interview 100 people in my show and all of them are extremely successful. I have been very fortunate in the sense that I’ve interviewed some people I have a lot of respect for. The thing that stuck to me the most was a conversation I had about building relationships with successful, influential, high–profile people and how to go about that. With anything, it’s all about your net worth but you want to attract the right people. You want to attract someone who is an ultra–high performer that will basically mentor you for free and I have found the snowball gets going very quickly. 

There’s a formula basically, a high demand for excellence, constant curiosity and a sense of urgency for accomplishing your goals. That’s what you have and that’s what got you to where you are. That’s what I have, that’s what got the relationship that I have gotten. Any time someone shows me those characteristics, two things simultaneously happen. Number one, I want to be a facilitator for their success because I’m 100% confident that they will succeed. Number two, I don’t want to compete against them in the back of my mind. I want to be there to help formulate that so that when they write their book about their millions, I’ll maybe include as opposed to they come after me. There you go. I like that sense of urgency. If you’re just getting started, if you show those three things to people, the right people will be so drawn to help you. 

In this business, more so than anything else I’ve been involved with, it is such a people business. People are very willing to help, not everybody but the right people. If they see potential in you or they see something in the future, you can make some awesome connections and go a lot further, a lot faster by meeting the right people and getting out there and networking and all that good stuff. It’s been a great conversation. Thanks for joining us. Where can the audience get in touch with you? The podcast, Asym Capital, give us all of that. 

You can find the podcast, Cash Flow Connections Real Estate Podcast. Then the investment company is AsymCapital.com. If you’re interested in getting an eBook about the self–storage vehicle, shoot me an email at Info@AsymCapital.com. I’ll shoot you a bunch of free goodies and a bunch of content. 

Thank you for joining us. Go check out his podcast. It’s a great podcast and he has been on many others as well. Go check out those appearances. I’m sure those are on your website. Everybody should learn more about self–storage. I love it. It’s a fantastic business. It’s a great place to passively invest in real estate. I’m a big fan. Thank you for joining us and I look forward to talking with you again soon. 

Thanks again, Taylor. 

Important Links:

• Cash Flow Connections Podcast 
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 About Hunter Thompson

Hunter is a full-time real estate investor and founder of Asym Capital, a private equity firm based out of Los Angeles, CA. Since starting Asym Capital, Hunter has helped more than 250 investors allocate capital to over 100 properties. He has personally raised more than $20mm in private capital and controls more than $60mm of commercial real estate. In addition to his experience as an investor, Hunter is the author of Little Boxes, Big Profits: A Passive Investor’s Guide to Self-Storage. He is also the host of the Cash Flow Connections Real Estate Podcast, which helps investors learn the intricacies of commercial real estate from the comfort of their home, car, or office.

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