Zero to $5M: 3 Mistakes To Avoid

[Nichole Stohler]

What is stopping you from investing in real estate? Is it time? Money? Lack of experience? Or maybe even limited deals?

My husband and I have been there. Done that. Failed. And then…. kept going to our recent close on a $5M property. It’s been a long road but well worth it.

In the past 6 years, we have self-funded and “traded up” from a 4-plex purchased for less than $100K to now owning a mid-sized hotel. Our path included: 4-Plex → 7-Plex→ 28 Unit → 50 Unit→ 80 Room Hotel.

Our journey started 17 years ago when we attended our first real estate seminar and then found 3 owner financed properties. We had zero money for down payments, so we leveraged credit card cash advances. And then…. lost money, sank into debt, gave back the properties, sold our house and moved in with parents to repair our finances.

You may think… isn’t this supposed to be a success story? Are you trying to discourage me? Not at all. Sometimes the best success stories come from the biggest failures. Not everything is perfect and easy. So what was wrong? What did we fix when we got back into the business in 2011?

1. Location. What is happening in your market? What are the prospects for job growth? Back in 2000, we lived in a dying small Midwest factory town and those 3 properties weren’t in the best areas. It was hard to keep some of the units rented and vacancies hurt our profitability. We now live in Phoenix and are specific regarding the areas where we buy properties.
2. Price. Have you leveraged the property analysis tools on Bigger Pockets? 17 years ago, we didn’t understand how to do a full analysis of the property to calculate cash flow and opportunities for value-add. We understand now how to determine the right purchase price. This is why when we sold our 50 unit property in late 2016 we pivoted into hotels as the numbers do not work for many multi-family properties in Phoenix right now.
3. Operations. Are you planning to self-manage? Or use a property manager? Either way, do you understand what levers you have to gain the greatest return? We didn’t understand these fundamentals back in 2000. During our break from owning properties, we learned about the operational side of the business when my husband worked in both property management and commercial real estate sales. To avoid making the same mistakes with the hotel due to lack of experience, we’ve partnered with an experienced hotel operator.

Are you struggling to find a good deal? Worried that your property will not provide the cash flow needed? Where do you stand with these three fundamentals? Which one can you effect right now? Would love to hear comments on your current challenges.

[Sendi Becerra]

@NicholeStohler What book would you recommend to help you understand rentals?

[Rick Thawani]

Nichole Stohler thanks for sharing your very inspiring story!

I am in the hotel business and must commend you on taking the leap from residential property management to hotel ownership.

Good Luck to You and your Husband!

Rick 

[Tim Puffer]

Boom! @Nichole Stohler !! This is the reason to not give up. You are always going to be knocked down somehow in everything you do and you can't let it defeat you.

Thanks for sharing!!

[Nichole Stohler]

@Allan Robbins , great news is you have funds.  As a broker, what types of properties are you typically representing and selling?  

[Nichole Stohler]

@Donna Jones , after I responded to Polly Wu I realized you are asking a similar question.   Being a bit new to the BP forums it seemed I couldn't edit and add your name in the mention...  here's the response:

We are currently seeing that the price per door for multi-family have actually surpassed the prices that we saw at the height of the market in 2007 right before the collapse. This is driving CAP Rates down at or below 6%. I'm not sure how long the market can bear these increases and we didn't want to get stuck buying at a premium. You make money when you buy at the right price, not when you sell. There are other places to invest that are still trending upwards for better returns in our opinion.

[David Zheng]

@Nichole Stohler

Slightly more fun questions, but I've always dreamed of owning a big hotel.

Does your hotel have a restaurant, bar, nightclub, shops, casino, etc? If yes to any of them, as owners have you ever just walked into the venue and do/eat whatever you want and just say "I own this place" :)

[Polly Wu]

Originally posted by @Nichole Stohler:

Yes, I agreed. We are having a hard time finding any deal that the number will make sense to us. It's better to invest in other uptrending markets. 

[Michael Shear]

Nichole,

Thank you for your fantastic post. I find that all of the best stories, if not all true stories, always have a rollercoaster ride built in. I tend to be extremely skeptic of anyone that gives post about hitting the jackpot 8 times in a row without failure. You never know how you will react when you go from having something to losing it all. I think that it shows a real winner when they are so close to achieving what they want and then it goes away completely, yet they get back up and go back after it again. Usually the second effort leads them to the real success that they were looking for if not 10x'ing the first goal.

[Jerome Kaidor]

@Nichole Stohler - I would love to add more units.  Here in the SF bay area, inventory is very tight, and prices are frankly ridiculous.   If you offer a price that the numbers would support - somebody outbids you.  There's a lot of foreign money coming in.

Something came across my email inbox - five 1bedroom-1bath apartments in a converted Victorian - claimed cap rate less than 5%.  IMHO A recipe for losing money.

[Jerome Kaidor]

@Nichole Stohler - I would love to add more units.  Here in the SF bay area, inventory is very tight, and prices are frankly ridiculous.   If you offer a price that the numbers would support - somebody outbids you.  There's a lot of foreign money coming in.

Something came across my email inbox - five 1bedr-1bath apartments in a converted Victorian - claimed cap rate less than 5%.  A recipe for losing money.

[Alex Shaughnessy]

Thank you Nichole

[Account Closed]

@Nichole Stohler, thank you for the response. "long-term tenants with a pride of ownership mentality," an excellent nugget of information!

You purchased the 7-plex with the long-term tenants in place, might I ask how much longer did they have on their lease(s) at the time you took ownership?

[Matt Issa]

I got my real estate license back in November of 2016. I've held many different hourly/salary positions from hospitality to medical. I moved here with family from overseas back in 1999 and finished high school and college here in Houston. I come from a culture that unless you're a doctor, lawyer or an engineer, then there isn't a good life available for you! This mentality took a toll on me and I pursued medical school route and worked with top surgeons and realized, this is not for me in a sense I realized I would still work for someone else. My family and I have sacrificed a lot to be here and we sure didn't move here across the world to love AVERAGE. I've always had the business mind but somewhere along the road i thought i lost my edge. I'm currently fearless, hungry to strive. I am academically and street smart, do my research however biggest problem is i'm a perfectionist which holds me back in starting projects etc. Those of you that have gone through a similar journey and self started things, where do I start, as far as real estate goes? Looking for guidance. Thank you in advance!

Matt

[Ryan Wittig]

Thank you for candidly sharing your experiences Nichole and congrats on being a survivor :)

Educate yourself, do the analysis on cost/location and have a plan for how you are going to manage the property.

[Allan Robbins]

I primarily deal with residential properties thus far. - But I have an accounting background - and thus, I am able to explore other concepts or commercial investments if those were an option - I just do not know what direction to take and or what initial steps to take.

[Nichole Stohler]

@David Zheng , love the questions!  We're not that fancy... no restaurant, no casino...   

You mention always dreaming of owning a big hotel.  What types of properties do you currently own? 

[Nichole Stohler]

@Account Closed , there was actually a married couple who had lived there over 20 years!  They kept watch on things and whenever there was a vacancy, they reached out to their network to fill it.  Basically, a pride of ownership in that they didn't want just anyone moving in.   Amazing tenants to have!   Leases were 1 year and everyone in that complex was a dream tenant.

[Nichole Stohler]

@Ron Gosling , let's see... first properties that got us in trouble used credit card cash advances. Perhaps this could have worked. Hard to say as we didn't understand the operational costs involved and lost money. 4-Plex was a residential loan. 7-plex was technically 2 parcels so 2 residential loans. 28 unit started as owner-finance but as quickly as we could get approval we moved to a commercial loan for better rates. 50 unit was a commercial loan with the same bank that already knew us from the 28 unit. The hotel is actually a SMB loan. Each was a progression as we sold to move on so we weren't using existing properties as leverage. HELOC and property leverage are strategies we'd consider, it's just that our scenario so far has been different.

[David Zheng]

@Nichole Stohler

Right now I personally own 4 condos, 4 SFH, a tri, a quad, and a duplex.

Next plan is to get a 12+ unit, then vacation homes, then hopefully a hotel of some sort.

I don't know why but I've always dreamed of owning a large vegas style hotet/casino and just being able to do anything I want cause I own it haha

[Frankie Woods]

Love this story!  Thanks for sharing!

[Theresa Haywood]

I live and want to start investing in Baltimore which can be a "weird creature of its own". I have obtained funding, have personal line of credit for emergency and been looking on the MLS for properties. I also reached out to a few wholesalers. My dilemma is being that Baltimore is such a "weird creature" with its block by block issues finding a home has been challenging. Multiple investors are in Baltimore all in the same areas (the nicer ones of course) because DC is so saturated now and there is a lack of inventory. My next step is to go to the planning board for the city and see whats in the works because I need to get a property or two under contract soon. I'm a little apprehensive to buy outside of areas I'm comfortable with because of that fear... Any advice?

[Ned Carey]

@Theresa Haywood you really should start a thread of your own with a question like that. few people will see it here buried in an older thread.

Firstly, you do not need a " a property or two under contract soon."  That makes you a motivated buyer. This puts you at risk of paying to much or just doing a bad deal. 

The best think you can do is look at lots of deals. All kinds of deals, Wholesalers, open houses, listed properties, FSBO, live public auctions, stop at every property you see being rehabbed etc. You will start to get comfortable with the market and values. Yes Baltimore can be block by block in some areas. However it is no secret. You only need to drive from one block to the next to see how and why it changes.