How small buys turned into 7 figures in passive income with Wes Hill

Well, I think one thing I figured out early was that there's always need for affordable housing. And I felt like that 30 years ago when I was in my 20s, and it's the case today, and it'll be even more so the case for decades to come. So I just don't know how you could almost go wrong with the right type of multifamily deals.

West Hill is a testament to the power of real estate and building wealth over the long haul. He started his investing career young, knowing that time was on his side, and he's made it work for him big time. In this conversation, Wes, Bob, and I get into how he built his real estate empire out of next to nothing by playing the long game. Here's Wes. We're very excited to bring on one of our investors and longtime friends, Wes Hill. And Wes, we're so excited to chat with you because we have a lot of respect for you. We've known you from afar for a while, and over the past really year or two, we've gotten to know you more. And so I'm excited to dive in.

Looking forward to it.

Bob, we got you on the line too. So this is gonna be really fun to dive into the real specific questions. Yeah.

I'm super excited about this part of our program because we get to meet really cool people who have really done it and learn the good, the bad, and the ugly, right?

That's right.

So yeah, I'm super looking forward to this.

So with that, Wes, welcome to the show. Thanks for coming on.

Great to be with you guys. Looking forward to it.

Why don't you share with us your origin story? Just tell us about your journey a little bit and how you got started, how you first came into a little bit of money and all that.

Sure, you bet. I'm mid-50s. I went to college in San Diego, and during college I worked for a couple that owned about 6 rental properties, and I did lawn mowing and painting and maintenance and eventually bookkeeping and leasing and graduated from the University of San Diego in 1992 and moved up to Chico, California. Where I took a property management job, got my real estate license, and was a property manager.

Like for multifamily?

Strictly multifamily. Yes. No commercial.

Okay.

No single family to speak of. And just grinded it out in the '90s. I learned how to market and turn around buildings and the nuts and bolts of property management. And during that time, my wife and I, we got married in our mid-20s. We decided to live off half our income and invest the other half. We were making a whopping combined income of $60,000 a year between us.

All of $60,000 in California.

I know, mid-'90s.

And you lived on half of that for years.

And our goal was to learn how to live on half and invest half of that.

Was that like a principle that you had learned or just made that up?

We wanted her to be able to stay home with the kids. We wanted to have kids after 5 years of marriage. And it was a goal to learn how to live on half our income. But also, I knew the time value of money and time is your biggest ally in investing. And so we were able to buy duplexes, fourplexes, maybe a 6-unit, I think, throughout the mid-'90s. Wow.

So you started buying pretty early on as a part-time gig, and you, because you know how to manage 'em, you managed 'em.

Correct. We had maybe 8 or 10 units when the dot-com thing took off in the '90s, and then Chico started to take off, and those values that we paid $100,000 for a fourplex, I sound really old by saying that, became worth 3 times that. So we had a little pop in value during that time. And then in 2000 to 2020, I owned a property management company that I ran and had locally.

You started your own business?

Correct. In 2000, we, we had for about 19 or 20 years, we had a property management business.

That's not a high margin business, right? I mean, that's a lot of work and you're picking up dimes, right?

I think we netted, we had like 700 units that we netted maybe $250, $300 a year on it. But I always viewed the management company as a means to investing, always. And I wanted to do it long enough to get out of it, make enough money to get out of it where my passive income exceeded my cash flow from the management company.

Wow. So you, the whole time while you're in a, in your career, you were building an asset base and you're focusing on building assets.

Yes. By, I mean, our first kind of real size deal was in 2006. So now maybe, uh, 40 that time. And we bought a 98-unit in Eugene, Oregon. We put 6 of us together and raised $2 million and did one LLC. It wasn't even a tenants in common structure, paid $6 million for it. And we sold it for a $3 million profit, and then we bought a 295-unit building. And that was kind of a turning point. We were able to refinance, pull out all the money, buy another $30 million deal with the proceeds, and, you know, increase our cash flow dramatically. Everybody got their money back. So that's the ideal model, right? You invest, you add value, return money, and, and go from there.

And then you just pyramid it, right? You pull equity out of something and continue to redeploy it and compound, right?

Absolutely. I mean, by refinancing, I mean, of course we hit it well in 2021 when rates were coming down dramatically. We took a 3.75% interest rate loan to a 2.81%, one that was amortizing to interest only. We pulled out $15 million and our payment went down $10,000 a month, if you can imagine.

Oh my God. Is anybody applying for those rates still? My God. It's like, I remember telling people, doesn't matter what you buy, just buy anything. When they're giving money away for free, it's like, borrow, because I promise you those rates are going up. And/or inflation, one of those two things is going to happen. And sure enough, one of the points I make in my book, Invest Like a Billionaire, is that real estate superpower is inflation hedge, right? Because it doesn't matter what inflation is, it's just going to beat it. And it really more like quadruples it because you're leveraged, right? You're leveraged 3 to 4x. So you're a poster boy for really the power of real estate over time. It's wonderful.

Yeah, in that case, you know, we took that $15 million and bought a $30 million deal in Salt Lake City, which also kicked off $600,000 a year. So everybody has their money back. And I think combined we're producing about $2 million in cash flow for the 6 partners.

And everybody has their money back.

I love to make another point in the book, just how the ultra-wealthy use smart leverage, right? Because, you know, the big talking heads will say, don't have any debt, right? But that's not the best way to build wealth.

If Wes Hill had never borrowed any money, he would be broke today. I say debt is like a fire. It can burn your house down. It can also cook a great steak, right? You choose which, right?

Sure. And we are in a situation with that crazy low interest rate and we have 6 years remaining on that loan where we will see a reduction in cash flow when we have to refi. We know that 6 years from now. So we're in the glory years in that particular scenario. But we all knew that going into it that we will not see 2.8% interest-only loans for $52 million anytime soon.

So yeah, I think that's probably right.

Well, so I want to go back just a few steps here. Was there like an intentional approach that you took when you were building your wealth in real estate? Or was it a happy accident that you started seeing the power of these things working? You're like, man, I gotta double down on this. Or was there kind of, you saw it early on and you're like, I'm just gonna do it. And, you know, never looked back.

I think I saw the power of taking smaller equities and leveraging them into bigger equities with partners. So for example, the fourplex that I bought in 1994 when we just got married became worth, I'd say, $200,000 equity. Well, that 1031 into a bigger deal with 4 or 5 other partners, sometimes we would see our cash flow double by doing that. So all the little stuff I bought in the '90s, we did that multiple times with bigger properties And so just seeing the power of that re-leverage, we really understood that and that helped take the smaller things and move 'em into bigger things.

If you don't mind sharing kind of your net worth and net worth range, and also you put here your passive income number, I think these are really helpful to give a frame of reference for listeners.

Yeah, well, I'm in the mid-40s on net worth and made $2 million of passive cash flow from everything. So I'm in that kind of category.

So most of your net worth, I'm looking here, it's really 75% in multifamily. Are you still just going to hold those for a long time? Are you, how are you thinking about your portfolio.

So I have a nice portfolio, about 2,000 units, but I have a variety of, you know, interest in that, maybe 30% of that. And if we're getting a pretty low return, say a 2 or 3% on the net equity, not return on investment but equity, and releveraged it, and I can then go get even a boring 5 or 6% return, which we probably can today, which the stuff we're looking at is usually in the 5 to 6% initial cash-on-cash return, But if our current equity on the current ownership deal is 2 or 3% on equity, hey, we're doubling our return, right?

So you're looking primarily return on equity and your magic number is like 5%?

If on a re-leverage, it's 5 or 6 on the new building. But if we're getting a low return, like 2, 3%, maybe 4% on equity—

You're going to sell it.

We want to move that equity. And we've been able to do long escrows on the upleg, the replacement property. So we have time, we find the upleg, we have a long escrow, and then we get the building sold.

Do a 1031 exchange to avoid taxes.

Absolutely.

Yeah.

So we don't just go, okay, let's sell, go look for something. We've never done that. We've always found the replacement property first and had a long escrow.

Return on equity, just to be clear, is your annual cash flow, cash yield based on the equity you put in, right? So it's current equity because you'd expect to earn more than that with appreciation and pay down a principal, but on the cash yield on the money you put in, that's really what you're looking at, right?

Correct. Again, just want to differentiate between current equity versus return on what you invested in maybe 10 or 20 years ago. That's irrelevant.

So he's valuing the property, you know, thumbnail value. So if the value is creeping up and the cash flow isn't, it's okay, let's either refi this or sell it and redeploy that equity where it can be more productive. So do you, are you thinking about going more passive or do you like this? It's, I mean, you don't want to sell any of the multifamily because you don't want to pay the taxes. You want to continue to 1031. But how do you think about your portfolio going forward?

We do use an asset management company that oversees the property managers. So we are involved in that at that level. We don't directly manage anything. So in one respect, it's quite passive. I do get weekly occupancy reports, and I do look at the financials, and we do have meetings and visit the property quarterly, etc. But it's quite passive. So when you have a good management company, it should be passive, right? They should be calling you about the bigger things, not the day-to-day problems. But obviously, I don't need to live on all that cash flow, so I have been deploying into alternative investments such as Aspen funds, which has been an excellent relationship with your group. I did a land development deal that did not happen. So that equity is just sitting there. I did an ATM fund that was a disaster. I did an oil deal that I'm getting about a 1% return on in year 3. And they didn't tell me it's going to take 25 years to build out this oil field, by the way. So that's been a disappointment. I mean, I had all this money to deploy when we did all the refis in 2021, and I wish I put it all with Aspen. Let me put it that way.

Yeah. You know what our oil fund's yielding? Should I tell him, Ben? I don't know.

I don't know if you want to make him feel that sad.

I know. It's not even dividending all of its cash flow and I'm cash flowing it in almost an 18% rate right now.

Incredible.

That's even pre-drilling, which it's going to go up from there. So yeah, it really matters. You know, and that's one of the points that I make in the book is that sponsors really matter. I mean, the difference between the best real estate managers and the worst real estate managers is like 1.5 percentage points of return difference. Difference, not much. In the private markets, it's either doubling the public markets or losing money. I mean, how well you do is really dependent on manager selection.

Well, talk about that a little bit, Wes. So talk about the transition. So you've spent several decades building your wealth, you've got this great cash flow, you've done some refinances, you have all this cash you're sitting on. Hey, let me go and invest passively now and go diversify some of my net worth into other asset classes. This shouldn't be that hard. I'm a smart guy. I've been investing for several decades and I know what to look for, right?

Everybody thinks they're a smart guy.

So what was that process like? Was there an element of surprise looking back now, or what were some of the kind of keys that you've learned since then?

Yeah, I started attending a lot of seminars and syndication events and meeting up with people and getting pitched a lot of deals. And I flew out to several deals and the oil deal, I went out there to Louisiana, went on the tour and I don't know anything about oil, but I felt good about about the presentation and the guys behind it and such. I probably should have interviewed several of the existing investors and asked them their opinion. There's this pull-push in your portfolio. You stick with what you know. I'm probably 75% in multifamily of my net worth. Keep doing that for the rest of my life or diversification. So, I was trying to find that balance of going to other things. And I do have some in the stock market as well, but I felt like it was a good opportunity since I had the liquidity from all the transactions we did in 2020 and 2021 to try something new. And I view the Aspen money— I am in the residential loan program and the private credit fund— as medium-term money. I probably won't have it there for 20 years. I probably have it there for 3 to 5, in that range, who knows, and then deploy it into maybe something, a hard asset, if I find a great multifamily deal. But these other deals, like the oil deal, I really didn't think it through enough, and there's no getting out of it because they're trying to raise money to finish off the oil field. So I'm in it for life.

So what What lessons do you learn from that? What red flags did you see and what's your takeaways from that deal?

I would say, like I said, definitely interview some of the existing clients.

Yeah, that makes a lot of sense.

I even did so, I think with Aspen, I was able to get access to some, a few of your clients and ask them how they felt about it. There's a balance between sticking with what you know and expanding, you know, to something new. So I don't know if I have a real answer as to how I would've done that differently with regards to stepping out of multifamily. 'Cause I think it's a good idea to not be so heavy in one thing. And I am trying to boost my stock portfolio actually as, as over the next few years. But on the deal that was a total fraud, I had a few gut checks. I wish I had listened to my gut.

And you're talking about the ATM fund that turned out to be fraudulent.

Correct.

So tell us what the red flags were. Tell us what the gut check was that you ignored and why you ignored it.

Well, I think I trusted the main guy who is an honorable and honest guy. He got scammed too. So it's not a reflection on him in any respect, his integrity. He got scammed as well. Family and his network and his friends. It's got to be heart-wrenching for him. He's very wealthy and he's done very well overall with all of his things.

Right.

So I relied too much on one person's judgment of the operator. I think I thought to myself, ATMs, that seems like a dying industry. Who uses cash anymore? And that was my feeling. And that was my 25-year-old son's thought. It was like, what the— what is this? Why are you doing this? And turns out it's a diminishing investment. Fewer and fewer people are using these things, but they had all their reasons for why. And then secondly, they were too quick to just modify the deal. Like when things didn't go right initially, they're like, oh, we'll add 2% to the overall rate of return. I mean, can you imagine, Ben, you know, if I said, hey Ben, we're only getting 8.5% and you promised 9%. Oh, well, we'll add it to the backend. No problem. Willy-nilly, just adding it. They were too quick to just immediately try to satisfy the urges or the frustrations of the investor. And guess what? Sometimes investments don't go right, but the answer is not to just throw money at it. And they throwing money at it because there was nothing there.

That makes a lot of sense. And, and it was also like, I mean, there almost 28% return, I think, right?

It was an unrealistic return. That should have been a third red flag. You're right.

Yeah.

So let's dive into this in diversification versus what you know, and obviously you're expert multifamily investor and you proven that by building out a lot of deals. But a lot of guys right now are really hurting in the multifamily space. I'm sure you're well aware, right, that a lot of these guys did bridge and did this, you know, really hitting the wall and all that. But what do you think about investing in what you know versus diversification?

Well, I think the bulk of your net worth should be in what you know. And that is the case in my situation. I think so many people got into this business way too easily with the syndication model and raising money and adding bridge debt and not knowing the downsides of all that. We've always looked at when we buy something, we have a 10-year horizon. We're probably putting a 10 or 12-year loan on it, and we're probably not going to refi unless rates really go crazy low. But we feel like, you know, this is a long-term investment. And the last two deals in Nevada, right around $30 million, we did 50% loans, and they're amortizing loans, and then with partners. So we brought in $15 million on each, and it's paying down $25,000, $30,000 a month of debt reduction.

You got no issues, right? It's never going to go under because of the debt's so low. It's just not an issue. And the bankers love you. I'm sure they're like, this is the safest loan I've ever made.

Sure, it was a loan assumption. So when we have to refi in 3 or 4 years, even if the value doesn't go up, it'll be a 40% loan-to-value with the debt reduction. So that's a very safe place for everybody to be. But I think my main point is just having a long-term horizon and not overleveraging Right. Yes, leverage is powerful. It's a two-edged sword, like you said, referenced early, Bob Fraser Fraser Fraser. But I'd rather be a little bit more cautious and not try and flip deals or do value-add and try and put bridge loan because I mean, the only way that those deals work is everything goes right. And who's going to make the most money? The syndicator. And the shortest time frame to flip that thing is the most profitable. And most investors, in my experience, want a long-term steady cash flow they can rely on with consistent cash flow.

One of the things I love about what you've done is that you're not chasing headline returns. I find in my interaction with investors, it's like if you say 35% returns or 30% returns, everybody wants to pile in. And if I say 5% returns, nobody wants to pile in. And, and it means nothing. I mean, it's just, it's easy to put it out there, right? And one of the things I appreciate about you is you're really looking primarily for good, solid deals. And you want to make sure the returns are in range, but you're not just being a sucker for another point or two of cash flow, right?

Absolutely. We want to have these relate. We only have about 40 partners in all our deals and they're long-term friends. And we don't want to— we don't want to lose friends in this process.

Everything you said so far, you're talking about the cash yield, right? And really, what am I getting that first year? And that's a very different approach than a lot of investors in real estate where they can accept no cash flow for a few years in a development deal or a heavy repositioning or value-add deal, right? But you're really looking at, I'm going to go a little bit more conservative on my risk-return, and I want that cash yield paying me day one. And if I can increase that over time, then that's only going to sweeten the deal. Now, I mean, you said your annual passive cash flow exceeds $2 million. So that's a number that would probably work for a lot of people, right? And was that always part of your buy box of I have to have cash flow day one? Or was that kind of over time you realized, hey, this is just the risk tolerance I'm comfortable with?

Well, back in the '90s, when we started buying, I would send out letters to the whole neighborhoods that I was looking to buy in and looking for seller carry, and that the interest rate at that time, for the most part in the '90s, was about 8%, maybe amortized or interest only. And I didn't have the resources, as I already disclosed, my salary in the '90s to have negative cash flow, right? My goal was to have a 6 or 7% return on investment with an 8% loan from day one on the stuff we bought in the '90s. So that's, that was my point of reference. The only negative cash flow deal I had done is, was one we built out a 12-unit building locally. And it stressed me out for like 9 months during the whole construction process, because obviously there's no cash flow. And then it took a little while after the certificates of occupancy were done, just to get cash flow. So I didn't like that process. I'm not a developer. And I didn't like the process of that whole experience of shelling out lots of money every month to the lender and to the contractors. So, I think it's always been a priority to me to have cash flow. I think everybody wants to get a distribution every month or every quarter. And even if it's modest, it's better than zero. And that's what makes people comfortable and happy that they're getting something out of it every month.

Now, you haven't mentioned financial advisors. How do you use financial advisors?

I don't have a formal advisor that—

For real estate?

For real estate.

So, you don't have a financial advisor who helps you manage your portfolio?

Portfolio? No, there's 3 of us that own our asset management company that oversees the 2,000 units, and we bounce ideas constantly off each other. But I would say really interaction with commercial brokers, the CBREs, the Marcus Millichap— those guys are really helpful to understand values, what's happening in the market.

But you don't have a traditional financial—

I do recently, I do with regards to my stock portfolio, and he analyzed our depreciation schedule and such just to see where depreciation is burning off. And in my case, in about 2 years I'm going to be paying some serious taxes because of the accelerated depreciation. That we took. The depreciation.

Yeah.

Yep.

That's the real estate burns off. All the depreciation burns off and now you're going to be paying taxes.

And that's right.

But he's got to be juicing over your large real estate portfolio and figuring he wants you to sell all that and get it under him to go in the stock market. Right. And is that where you're headed? And how do you feel about that?

He's got a lot of integrity, but he sees it all. And yes, he certainly would like to. And there is some benefit to a stock portfolio with regards to liquidity. Lenders look at your liquidity and as addicted real estate people, we usually don't have a lot of cash on hand. I'm about a 2% of my net worth is in the stock market, so it's not a big consideration.

Fair enough. No, I actually— I mean, my studies show that 20 to 30% of most billionaires' net worth is in the public markets, and that's stocks and bonds. And there's a lot to say for those things. I just think most people are overinvested, right? And should be getting into multifamily and other alts.

Yeah, and in a lot of ways, Wes, your portfolio is kind of inverse of a lot of people, right? Where they're mostly stocks and bonds, and now they got to layer in some real estate. But you're thinking the other way, because again, there is a good case to have portfolio of liquid investments, although it is a little hard to stomach some of the valuations right now in the market.

Yeah, bonds are actually a good value. I mean, you think about it, I'm looking at your cash yields on a lot of your apartments, you do better in a Treasury.

I know, Wes, I'd love to hear just zooming out a little bit, right? You've been through a lot of investment cycles, several economic cycles. What are some of this— the takeaways, right, of seeing the ups and the downs?

Well, I think one thing I figured out early was that there's always need for affordable housing. And we are in B-class properties. We have a couple of A, a couple of C, but middle of the road, down the middle of the fairway, basic housing for people. That is always going to be. And I felt like that 30 years ago when I was in my 20s. And it's the case today, and it'll be more so the case for decades to come. So I just don't know how you can— if you leverage it right, not over-leverage and get good debt and get long horizon, how you can almost go wrong on a quality property in the right states. We are moving away from California. We're heavy in Utah, Nevada, North Dakota, and Washington, and also Eugene, Oregon. So it does matter where because the rent control rules and all that sort of thing, eviction rules are ridiculous in certain liberal states. But I think just if you take it conservative, I don't see how you could almost go wrong with the right type of multifamily deals.

Love it.

Yeah. I mean, I don't think prices are going to go up near term, but long term I would agree. I mean, I think it's hard to lose.

We did a lot of interest-only loans, so it does juice the cash flow. And I do, as I am getting older, quote unquote, I do see myself wanting to reduce debt more and pay off some personal home or a personal second home or whatever, just to reduce my overall outgo. And that reduces risk. But I think we'll do amortizing loans moving forward, honestly, just to pay down the debt and be more conservative. But we've had a lot of benefit from interest-only loans to juice those cash flows. No doubt.

Yeah. What, what else is next for you kind of going forward? So like you said, you're mid-50s. Is it really achieving moderate diversification, reducing risk? What are some other things that are on your mind as far as where do you go from here? Are you thinking about legacy? Are you thinking about What's the next kind of 50 years look like?

I think we have some charities that we really do enjoy giving to. And I was just in the Philippines last week, in Japan before that, and we met with the group that serves the extreme poor and we got to see the kids that are getting college paid for. I mean, I think it's $2,000 per kid per year to pay for kids' college in the Philippines.

That's incredible.

That means a lot to us. And I do want to grow my net worth, but I'm more interested in helping others financially. Once I get my own kids through school and we will even be able to give more. But I think a steady growth of net worth, being more generous in the future. I think we've undergiven relative to our income, frankly, but we want to give more to charity as we get some of these expensive children in college out of our payroll. And our kids know our portfolio. We, they've traveled with us to the properties and I feel like they, even though they're privileged, very privileged, they really appreciate it. They see what we're trying to do with our charitable giving too. So that's just a general feeling of, I don't have some major net worth goal. I don't need to own airplane and this sort of thing. I just, I want to keep life as simple as possible and have some flexibility in the schedule and be as generous as possible.

Yeah, grow your eternal net worth.

Absolutely.

There you go.

That is far more important. Absolutely.

Makes it all worth it.

Absolutely. You sit with these parents who have 2 kids in the scholarship program and they're just bawling their eyes out in gratitude. In gratitude. And they gave us this beautiful book with all the pictures of all the students. Wow. All these gifts.

What is that word?

Just to be there in person, to experience that. It puts everything in perspective, doesn't it?

It It really does. I mean, you know, we're fighting for this or that or upset about this or that. And it just really puts it in perspective how little our issues are and how wealthy we are. Right. And it is, it's important to be generous.

Absolutely.

Wes, well, this has been really fun. Thank you so much for sharing just your wisdom and what you've learned along the way. I know I've taken several nuggets from this conversation. I'm sure our listeners will too. So thank you so much.

It's my pleasure. Great talking with you guys. We'll see you soon.

I'm so grateful we got to have Wes on the show and share some of his lessons with all of us. Some of the stories he shared are really sticking with me. First, the astronomical success that he found by making small, smart moves in real estate. He just kept taking small steps up the real estate ladder along with some trusted collaborators, and he turned that into incredible cash flow and incredible equity growth over a long period of time. And second, I'm glad that Wes shared some of his missteps that he had taken, because his story tells us that something seems too good to be true, it likely probably is. And so really listening to your gut can save you some heartache. Finally, the importance of generosity. I love Wes's generous heart. He's done great job of keeping the why behind why he's working so hard to build up his portfolio. He really wants to make sure his children are set up and also do some good with his assets at the end of the day. So I hope you all got as much out of the conversation as I did, and thanks again to Bob and Wes for that great chat. Be sure to subscribe to the show, leave us a review, and stay tuned because we have loads more interviews coming with wisdom, hard-won lessons, and current tips. See you there.