Real Estate Deal Analysis & Advice
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback
Updated over 7 years ago, 06/05/2017
Zero to $5M: 3 Mistakes To Avoid
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?
- 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.
- 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.
- 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.
@Randy K., not sure yet...we haven't had the hotel long enough to compare yet as we've been in multi-family for several years. It's a good question and I'll do a pros/cons update once we have more data. Right now, I'd say that we still prefer multi-family but that's only because it's what we know.
Have you found that owning a hotel is an uphill battle when going against airbnb? What kind of hotel is it? Luxury, mid ranged, or low end? Is your CCR better on the hotel or was it better on with the 50 unit?
@Chris Gibbs , we are in the mid-range business hotel class. Definitely, would see Airbnb competitive threat for the vacation market. For our guests, we see employees are booking through their company travel site and then choosing locations closest to business meetings/work. No impact on CC&R's between either property. Do you own any airbnb properties? We're curious about this market but haven't bought anything yet.
I do not own any airbnb at the moment and I see it as a risky investment. In Portland just in the last few months they put together legislation to ban multiple listings and listings from people that are not living there a certain amount of days of the year. What could be a great investment one month could be worthless the next due to out of your control circumstances. I have not heard of CC&R's I was talking about cash on cash return. I would assume it was much better because it is more involved and intricate business.
Nichole Stohler Great post, making me think.
Andrew Johnson you called it in CC cash advance investing.
I never did it for purchase but I've used it for rehab. Never again. It worked but I came close to crash and burn. I was a rookie, I underestimated the rehab. When I went back to the bank my DTI and utilization was so high I could only get high interest personal loans. Funny thing about those introductory rates. They stop showing up when you really need them. It worked out, but lessons learned. I keep a reserve now.
@Chris Gibbs , great point about the localization of any real estate investment and local regulations. Cash on cash is better with the hotel. It's also more fluid in revenue with opportunities to increase rates on a daily basis if you wanted to versus locked-in leases.
@Nichole Stohler , That makes since I suppose it is easier to raise a $70-$150 room by 10% then a $1500 rental.
@Nichole Stohler, very inspiring success story, I respect anyone that gets back on the horse after they've been knocked off!
In hindsight, the 4-plex you started with for less than $100k, did you have any difficulty with lower income tenants (I'm not sure if that's PC to ask)? Also did your first property require substantial work?
In other words, what did you learn specifically from that first purchase that enabled you to successfully purchase a 7-plex (aside from any widely available analytical tools)?
Thanks again for sharing!
Depending on the management. If it is a self managed hotel, not a franchise i.e. Hampton, Holiday inn type I don't know why you would want to compete in the arena unless you want to be a hotel person.
One benefit for hotel investing vs multi family would be your financing options. SBA EB5 type leverage.
I don't have any other experience so I can not give any in site of what these hotels sell for EBITA cash flow.
great story and I love the idea of being diverse! I'm 1 buy and hold house away from my origional rei goal. Lord willing I will be able safely meet that goal at the end of this year. I would really like to change gears once that goal is met. Apartments, mobile home park,laundromat, car wash...... How do you decide which way to go once you reach that point?
@Derrick W. congrats on being 1 house away from your original goal! When did you set the overall goal? And what kinds of things did you learn along the way?
Deciding on new areas was tough for us since we had failed in the beginning by not knowing what we were doing. We were definitely not going to invest in something new without either having help or doing a lot of research. I would talk with people in the areas you are looking at investing into. Ask about pros/cons, their best and worst experiences, etc. You are looking to understand what is involved and if this lines up with your goals...
@elliot
@Account Closed , yes... the 4-plex was a bit rough. The property didn't require a lot of rehab but keeping stable tenants was a problem. The 7-plex was a dream. Differences? The biggest thing on the 7-plex was long-term tenants with a pride of ownership mentality. The location was better too but the value of great long-term tenants was significant.
I'm not sure the owner would have sold the property if it weren't for the downturn in values and inability to get financing for the amount still owed when the 5-year mortgage came due.
my rei journey started august 24th 2015. I set a goal of 10 rental units in 10 years. That's a house a year, not too bad a goal. Things moved a little faster than expected though. If I'm able to purchase another house at the end of this year it puts me 7 1/2 YEARS ahead of schedual.
I have grown up in construction and had no problems buying, remodeling and maintenance. The biggest thing I learned was that I should have educated myself on being a landlord BEFORE I was a landlord. Contracts, screening and interacting with tenants was a rough uphill battle that I was totally unprepared for. That was a hard lesson I won't repeat when the time comes to diversify.
Great post. Thank you for sharing your experience and lessons learned over the years.
At your remarks on the current Phoenix multi family market, do you mind elaborating a little bit?
Thanks!
If you lived in WA and you had 50K on a LOC at 5% interest - what would you do if you were me, but still being you?
Thank you for your inspiring story. As a newbie, this is a new skill set. Hopefully with the help of BiggerPockets, I will be a success story.
Nicole, thank you for sharing your story. My husband and I have been looking for a small multifamily (10 units) for almost a year now and it seems the numbers don't work out. Our main search is the MLS. We are working with a great broker. However, prices for properties in South Florida are up the roof, seems like even higher than 2016 prices!
Great success story Nichole Stohler! Thank you!
Nichole
Who was your go to person in the Hotel Industry?
Nichole: My question is to your early comment that for multi-family units the numbers do not work now in Phoenix. I began self funding lower priced rentals, lately been flipping, and have been considering moving into multi-family. Any insight is much appreciated.
We travelled a similar path. Never got into hotels though. 1996 - a fourplex . 2001 - an 8-unit apartment building. 2003 - a fifty-unit complex. 2006 - a 20-unit complex ( which turned out to be a loser at the top-of-the-market price we paid, and ate our lunch for 10 years ). Last year successfully got rid of the 20 and bought a 13-unit apartment building.
We now have 74 units, minimally leveraged. And it all started with that fourplex in 1996. My wife wanted a tax writoff. She dragged me in, kicking & screaming. "But you can make 15% in a mutual fund!". By 2001, high tech mutual funds were in the toilet, and that fourplex was standing tall. And I discovered Loopnet.
@Polly Wu 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.
@Jerome Kaidor , great story!! You mention top-of-the-market price. Exactly what we are seeing in Phoenix now. Are you planning to add more units? And are you seeing the same profit-eating per unit costs in your area?
Congratulations on your success! It's an inspiring story. As a Phoenix-area newbie who's beginning to save for my first property (following Scott Trench's plan from his new book - saving to get to $25k is step one), I've heard and seen a lot about the numbers for multifamily properties not working in this area. Here's to hoping I meet the right people, or just have incredibly good luck, on my way to being ready to pull the trigger.
Hi Nichole,
Since you have been working REI for over 20 years, you may not remember the amounts for the question I would like to ask. There are tons of success stories on Bigger Pockets on how people grow their portfolios. The one area of growth I'm having trouble believing or understanding, is the amount of debt carried by an investor while accruing properties. Please tell me what you think was your average amount of debt (mortgages, HELOC , etc) you carried every year while working to your $5M level now.