What Stops You from Thinking BIG?

[Michael Ealy]

I feel sorry for a lot of BP'ers.

I see the same questions. I see the same struggles. I can see the same small thinking.

And I can see that a lot of newbie investors are doing real estate investing the hard way...the slow way and ironically, the slow & hard way is actually the risky way.

Here's the Slow & Hard Way - which is also Risky

1. You save up 20% downpayment to buy a 4-plex.  In a lot of markets, that 20% down is $40,000 or more. To a lot of people, that is their life savings.

2. After several years (or decades) of saving, you buy that 4-plex, you are excited you're making $400/month cashflow (not bad you tell yourself - as that is a 12% cash-on-cash return) but what they didn't tell you is that having a rental property is not really as "passive" as it's being portrayed by the gurus

3. And then the furnace goes out in the middle of winter...and then one of the units gets trashed or one of the units becomes vacant...and at the end of the year, you realize that you actually LOST money...ouch! and that's after working several lost weekends away from your family so you can work on this property...double ouch!

Now, before all of you get mad at me, the slow, hard & risky way is how I got started. The only exception is I've acquired properties without using any money - because when I started and went through bankruptcy and started again, I didn't have any money! You can read how I went from bankruptcy to over 1,000 apartment units below:

https://www.biggerpockets.com/forums/55/topics/690349-from-bankruptcy-to-1-000-units-part-1-thru-the-dark-tunnel

https://www.biggerpockets.com/forums/55/topics/692382-from-bankruptcy-to-1-000-units-part-2-rising-from-the-ruins

https://www.biggerpockets.com/forums/48/topics/695243-from-bankruptcy-to-1-000-units-part-3-how-to-build-an-empire

But after acquiring over 1,000 apartment units, I've realized, it's actually easier to do BIGGER deals than doing small deals.

Why Bigger Deals are Easier Than Smaller Deals

Bigger deals can afford a full time property manager and a full time maintenance manager. So you don't have to deal with tenant-drama. Bigger deals can afford 5-10 vacant units but 1 or 2 vacancies in a 4-plex can put you into negative cashflow territory. With bigger deals, you get financing that is dependent more on the income of the property (and after a certain size, your personal income does not matter anymore).  You can even get government programs that help you with the downpayment since you're providing housing for the masses. You can get tax abatements...which is the government agreeing to refund part of your investment into the property.

Now of course, bigger deals are "harder" in some sense. It's harder to qualify for financing since your net worth has to be equal to the loan you're trying to borrow. That means, if you need to borrow $5 Million from a bank to buy a 75-unit apartment complex, your net worth has to be at least $5 Million. You need to have the experience say in owning a 20-unit apartment before you can even qualify for a loan on a 75-unit building. Just to do the diligence on a 75-unit building, could cost you $10,000 UPFRONT...money you can literally lose just by paying for the inspection during due diligence.

Having said that...here's the FAST, & Easier Way to Make Money with Apartments

1. Partner with someone with the net worth and the experience. 

2. All the work that you do is finding deals or raising money, leveraging on that apartment investor's experience and net worth.

3. In exchange, you get paid either cash or equity in the property or both.

For a 100-unit building, that is acquired, say for $6M, you can get paid a $60,000 (1% acquisition) fee - $10,000 cash upfront + $50,000 equity in the property. A $6M deal can have $1M investor equity so that means, your $50K equity is 5% ownership in a 100-unit apartment building.

Cashflow for an apartment building that size can be $120K/year or better. Your share is $6,000/yr or $500/mo without having to worry about tenants, toilets and turnovers! When that same building is sold for a $2M profit 5-10 years from now, you receive a check for $100,000 (5% x $2M).

In a 10-year time period, 1 big deal can produce a $170,000 profit with NO money invested, no management or time involvement so no weekends away from your family...and minimal stress.

What if over that same 10 year period,  you've found just one BIG deal a year. That's $1.7M profit and all the work you've done is find the deals.

Now, before you say "That's easy for you to say Mike since you've acquired over 1,000 apartments already.", I've actually used this BIG Thinking - playing the bigger game with the BIG boys and leveraging on their experience and credibility - when I got into hotels.

Despite my experience and success with apartments, when I tried to borrow money to buy a 100-room hotel, banks asked me if I have experience with hotels, which I don't..so I got declined. I realized I was thinking small...I was not thinking BIG.

So what did I do?

1. I looked for, spoke with and agree to work with a group of hotel investors who have acquired over 5,000 hotel rooms worth $1.5 BILLION. 

2. The money I spent to get trained and coached with them and to leverage on their credibility and network is not cheap but it's worth it. Yup - their time is not free nor cheap (so I didn't expect to be mentored if I didn't have skin in the game).

Now banks don't turn me down when I apply for a loan to buy a 200-room hotel! When they ask me for the hotel management company that I am going to use for a particular project, the banks are amazed that I got them to agree to manage the project!

So...what about you?

Are you investing the "Slow & Hard" way?

What stops you from thinking BIG and playing a BIGGER game?