Supercharge Your Real Estate Investments with This Passive Strategy

Aviva (00:00)
This week's listener of the week is Mountain Money. Mountain Money, thank you for leaving us a five star review. And for those of you listening, if you leave us a five star review below, you might be next week's listener of the week. Week, week. This week on Commercial Real Estate Secrets, we have Matt Spagnolo. Matt is the fund co-manager at Colony Hills Capital. Matt.

Thank you so much for being on the show today.

Matt Spagnolo (00:29)
Glad to be here. Thanks for having me.

Aviva (00:31)
Yeah. So Matt, I'm excited to chat and excited to hear about your fund and who you are. Can you tell the audience who you are, what you do and why we are here today on Commercial Real Estate Secrets?

Matt Spagnolo (00:47)
Yeah, absolutely. Again, thanks for having me. My background historically has been in business and economics. Out of school, I got into more of the equities and options market trading, but also got the real estate bug at an early age. So I was finding a way to, I thought I wanted to be that investor at thousands, thousands of doors, things of that nature. So I started on the sales side. Everybody I talked to in real estate.

I was telling me, hey, Matt, start on the sales side, learn the industry, build a network, and then take it from there. Have a couple of mentors in the space, et cetera. So I started on the sales side, on the brokerage side with residential and commercial real estate, while also the same time kind of launching with our brokerage, a small investment team, right? So we were doing everything from small flips to looking at small apartment complexes. I was helping underwrite deals, find deals.

as well as kind of negotiate things of that nature. But I ended up getting connected with my now CEO, Glenn Hanson, at a conference in New Orleans. Glenn was looking for some assistance with his multifamily fund to raise capital for the fund, but also on a deal by deal basis. So got a little bit more involved on the capital raising side of commercial real estate, especially on the multifamily side. And I fell in love with Colony and our co-GP vehicle that really kind of allows

investors to achieve that passivity that they're looking for, whilst having that upside that GPs enjoy. So it ended up being this perfect balance between what I was looking for from a personal investment perspective, while also working with investors and helping them grow their own personal wealth as well. So it's been a fun ride with Colony and we're looking to scale and do more deals and bigger deals.

Aviva (02:25)
So you had brought up your co-GP vehicle being unique. Let's dive into that. What is it and why is it unique?

Matt Spagnolo (02:33)
do it.

Yeah, absolutely. So the co GP vehicle, there are a few other groups that are starting to do it now, but we really started it during COVID in 2020 capital markets were extremely tight. There were a bunch of new multifamily sponsors and operators, right? Interest rates were at 3 % for multifamily sponsors. So everybody was flooding in and colony. needed a way to

diversify ourselves, right? Or make ourselves stand out to the retail or high net worth investor. And we created this vehicle that would achieve two goals. It would one, allow investors to remain passive while also getting a share of the upside that the general partner or the operators usually enjoy. So you get a share of that. But it also allows Colony to do more deals, right? So we can share in the GP equity and allow us to buy.

two times as many deals, right? If we're bringing in additional capital and giving that upside, it allows us to do more deals and larger deals while focusing the same efforts on capital raising and more time on the business plan, right? And the actual execution of operating these deals. So that was kind of the main vehicle and the main purpose. Colony was started as the real estate arm for our CEO's family office.

and he wanted to continue his legacy past his own family and bloodline. So it again allows investors to have that kind of family office feel to some of the investments that we do within the fund, but also on a direct deal basis.

Aviva (04:05)
So what type of product are you investing in right now?

Matt Spagnolo (04:08)
Yeah, so that's another common theme with Colony is we have stuck with the same strategy since inception. So for over 15 years, Colony's focused on value add, core plus, garden style, multi-family. So the same asset class, workforce housing. We find these off-market mismanaged deals where we're getting opportunities to have a unique story, right? From mismanagement to them needing to sell, to funds rolling up.

but we're capturing these deals that have significant loss to lease, where the neighboring property is charging two to $500 more in rent and colony is going to come in through renovations and other improvements at the property. And we're going to capture that. So the story and the strategy has been the same and it's allowed us to be successful versus chasing those shiny objects and going into data centers or self storage, which are good investments for the right operator. But we found an asset class that

has worked well for us and we're sticking with it.

Aviva (05:06)
What's your pocket in terms of investment criteria?

Matt Spagnolo (05:11)
I would say that we're taking down deals that are 200 plus units, 50 to 150 million in size. In terms of markets, we're focused east of the Mississippi and Texas as well, with maybe a more recent focus back into the Northeast. And that might be a contrarian belief and thought to most sponsors and operators in the space now. But with some of the more uncontrollable expenses with insurance and taxes.

We're finding that these properties in the Northeast have almost been neglected and we're finding great deals, right? 15, 20 % discounts to the value of the property on day one. But those properties in the Northeast also have more consistent and expected tax reassessments and insurance, right? They may be higher in terms of a dollar amount, but as an operator, we can underwrite to that. What we can't underwrite to is uncertainty.

So if you don't know what's gonna happen to your property in the Southeast, that's a bigger red flag for us, regardless if it's cheaper on a dollar amount. We're okay with paying higher insurance or higher tax reassessments, as long as the year to year change is pretty vanilla and predictable.

Aviva (06:16)
Interesting. So what type of like returns are you looking at on these deals?

Matt Spagnolo (06:22)
Yeah, so with the co-GP vehicle, like I said, it's a little bit higher on the upside. So all of our deals, I'd say most of our deals are in the 20 plus IRR net to the investor with a, I'd say average 6 to 8 % yield. The deal we have right now that we're raising for is actually closer to 10 % average yield because of the dynamics of the deal. And that equals out to be about a two to two and a half X equity multiple for investors.

$100,000 investment will return $200,000 or $250,000 after the underwritten five-year hold.

Aviva (06:55)
Okay, so that was my next question. What are your hold periods like? What's the structure of your hold period?

Matt Spagnolo (06:59)
Yeah.

Absolutely. So I think I want to start with just a belief at Colonial's Capital. We believe of the velocity of money effect, right? How quickly can we turn your capital over and get it back to you and then into the next vehicle, right? Create that flywheel effect, I think is mutually beneficial. So we will always underwrite to a five year hold. That's just the traditional underwriting that we have. However, based off of the value add strategy that we do have.

Our value add is done by year three, ideally if we're executing correctly and then stabilized by year three. And that's where we can achieve the highest IRR on a property. So we want to capture as much cashflow as we can. But after that year three, the year over year changes, it stagnates, right? It's just stabilized. But if we can exit and then get into the next deal, like I said, we create that flywheel effect. our typical hold period, I'd say is three to five years in that timeframe.

And of the 10 exits that colonies have, we've been able to outperform that 20 IRR to have an levered IRR 36 % on those exits. So when we shrink that timeframe, the IRR will jump. So yeah, that's our strategy and we're sticking with it for the foreseeable future.

Aviva (08:17)
Can you explain what IRR is to me as if I'm a fifth grader?

Matt Spagnolo (08:22)
Absolutely. I think IRR and ARR or ROI are all terms that get thrown in the same bucket. And a lot of people, the most common one is ROI, right? Return on investment. So if you have 100 % return on your investment, that's great. You've doubled your money. But what is that over a 20 year timeframe? Is that over a 50 year timeframe? Right? Somebody tells me they got 100 % ROI. That's great. But if it's over 50 years, that's not so great.

So IRR is a unique vehicle or a unique number or statistic that annualizes the return, right? So it's a compounding number and breaks it down to a year by year. So if I've got a 25 % IRR over five year period, that's the equivalent of earning 25 % and then taking that 25 % and then earning it the second year and then again the third year and then again the fourth year on a compounding basis. So I don't know if...

It may be a little bit more advanced than a fifth grader, but I do want to emphasize the difference between ROI and IRR.

Aviva (09:21)
You

Yeah, it was a little, maybe sixth or seventh grade, but I haven't been to fifth grade in a while, so what advice?

Matt Spagnolo (09:31)
Hahaha

Hey,

these questions they ask on are you smarter than a fifth grader are pretty tough these days. So maybe the fifth graders are getting smarter.

Aviva (09:41)
I hope so. Somebody is. What advice do you have for someone who is an aspiring GP or LP in the space?

Matt Spagnolo (09:42)
Hahaha

I think it depends on obviously which bucket you're in, right? If you're an LP or you're a GP, I think obviously it starts with education and just becoming more knowledgeable of any industry, right? You can be an LP and a hedge fund. But I think becoming more educated on what your investment is going to be. But the biggest thing that I always talk about on podcasts or to anybody that I've talked to from my own personal success is your network, right?

is how far are you or how many contacts are you away from getting to the person that you want to meet or be introduced to. So start to build that network, value every relationship because you never know who they're going to be able to refer you to or who they might know that you want to talk to. So I would start with your network, build relationships. That's how we've been able to get the off-market deal flow that we do is because of our CEO and our CIO having 15 to 30 years worth of relationships in the industry.

that allow us to get some of those deals that maybe a first or second year operator or new GP might not be able to get.

Aviva (10:53)
Sure.

I love it. I love it. So Matt, what do you think 2025 holds for Colony Hills?

Matt Spagnolo (10:58)
Yeah

That's the burning question, isn't it? We're excited internally. think where we are buying in the market cycle, we're pumped about, right? So I think it's a combination of getting discounted deals right now. I think 2025, there'll be a lot of loans coming due from 2020, right? When COVID, all of those operators that got five-year debt in 2020, those properties are coming up.

We're excited about the opportunity in the multifamily space. We're already seeing some of that deal flow come in now with the deal that we've got right now is a unique offering. So we're excited. We're in full acquisition mode for our funds and for our direct deals. So we're excited. I think that the new administration will be positive for the real estate sector as well in terms of some of the depreciation benefits that have been there historically. So yeah, we're all...

We're all excited for 2025.

Aviva (11:56)
Love it. Matt, what makes you happy about what you do every day in commercial real estate?

Matt Spagnolo (12:03)
Absolutely. That's a great question. I think for me personally, because I came from the sales side, I was always working kind of one on one with clients and investors and hearing more of what their goals were. Obviously, the goal of anybody's investment in real estate is to make money. But some of my favorite clients on the brokerage side were the investors. We're the ones who were looking at the numbers and I could talk to them. But taking more of a fiduciary responsibility.

and hearing what their goals are, right? And just to be transparent with them. If they're looking for a different asset or a different investment, and I'm not gonna force our offering or what Colony has to that investor, if that makes sense. So really hearing everybody's story, what their bigger goals are, right? If it's to retire early or provide supplemental income or provide generational wealth for their kids. I wanna hear those stories and help that Colony and myself can be a part of that.

And I think that's what I enjoy the most is hearing each story, figuring out how colony can add value to them and help them achieve those short-term as well as long-term goals.

Aviva (13:07)
So Matt, say I own a 200 unit value add apartment complex in the Northeast. How am I getting a hold of you, finding you, following you and investing with you?

Matt Spagnolo (13:23)
Yeah, you can reach out to myself on LinkedIn, Matt Spagnolo. Colony Hills Capital is also our website, so you'll hear a little bit more about our fund on there. We have a direct deal offering as well. Like I mentioned, if you don't prefer to go the fund route, that direct deal will be listed there with all of the data and the information that you might want. We also do have a link for you to schedule a one-on-one call with myself for more information about the fund or the direct deal.

But happy to chat with anybody. I'm happy to also make any referrals or introductions that somebody might be looking for in the space of somebody that can help you. So I have the mindset of providing value to others before kind of receiving that value back. So any way that I can help you or anybody else that's listening, shoot me a call and happy to see how I can help.

Aviva (14:08)
Well, Matt, thank you so much for being on the show today. We'll put your information, yeah, we'll put your info in the show notes so everybody can contact you. And if you're listening, we'll see you next week.

Matt Spagnolo (14:12)
Thank you for having me.