Zero to $5M: 3 Mistakes To Avoid

Real Estate Success Stories 72 Replies

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.

Why did you sell the 50-unit in favor of the hotel?

@Matt B. great question!  The 50-unit was a fantastic property and we got an unsolicited offer which we turned down the first time.  The second offer was too good to pass up.  We'd been talking with the hotel operator for about a year so this gave us an opportunity to get into a bigger property.  

Originally posted by @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.

 Hi Nicole, I like your story!! Very inspiring, and I must say that you and your husband have so much bravery in the first place to use credit card to do the seller finance! For a newbie like me it is very risky and scary. I'm starting small, I'm solo in my journey, my goal is to have as many unit as possible too, and I'm only going after property that's as low as 70k single family house in B neighborhood using conventional loan.....Do you think it's a good start??  Any advice is appreciated!

Did you use a 1031 exchange to "trade up"?

@Chingju Hu could be a great place to start.  How do the numbers look factoring in expenses, any potential repairs, etc. against the possible rent?

@Andre Harris , good question.  We did for some of the transactions but not all just due to restrictions and timing.  

@Nichole Stohler Odd question but if you had used the same strategy of credit card advances to buy in a better market, would it have worked? I see that idea touted frequently here and I can seem to wrap my head around it. Thankfully, I don't have to but it seems (to me) that it massively increases the downside risk. Those pesky 20% interest rates if things go sideways can't be fun. So I guess it's two questions:

1.) Would your credit card advance strategy have worked in Phoenix?

2.) If you had used a more "traditional" 25% down mortgage to buy in the Midwest town, would that have worked?

@Andrew Johnson I had the same concerns at first until I saw a partner of mine apply the strategy. The key to the whole thing is to sell before the 0% introductory rate expires. Ex: If you currently have a Visa you can call Mstercard/Discovery/Amx and let them know of your interest in applying for a card. They all have intro cards that allows you to basically use there money for free for 6-12 months and say you have a Visa with a high balance of 10k this should be the min start point with the other cards. This will allow you to get the cash you need to proceed to the next deal. Hope that explains it alil better.

I can see how a hotel would be a good investment but it's interesting that you would choose that path when hotels are so much different than apartment complexes. How did you educate yourself on the hotel industry before taking the leap?

Medium copy of logo 03 aw sqr clrNathan G., American West Realty & Management | [email protected] | (307) 587‑9608 | http://www.rentcody.com | WY Agent # 12499

@Andre Harris I understand how it works, it's more about what happens if the flip takes too long, the credit cards don't have a high enough limit to cover unexpected costs, the impact on your credit score if "utilization" is too high.  Everything works out when you look at a spreadsheet.  It's that darn real world that gets in the way.  A 5% mortgage (cost of capital) is a different animal than a 20% interest rate.  But, hey, I'm an old risk-averse curmudgeon that focuses on limited downside as much (if not more) that maximizing upside.

@Andrew Johnson I can totally understand your approach. I guess the best way to do this strategy is apply it when you come across a property that checks off 90% of your criteria list. Then you "shouldn't" have to worry to much about the time expiring. Once again as we all know everything is "subject to" change! 

@Andre Harris Gotcha, unfortunalty what I see is the self-identified newbies talking about that strategy.  What are the odds that they have a complete checklist, accurate criteria, etc.?  While I wholeheartedly it's possible I wouldn't bank on it being probable.  Credit cards as a 0% interest choice (for cost of capital) is far different than using them because they are your ONLY source of capital.  

Yup, another grizzled curmudgeoned reply is now in the books for me...I'm off now to tell "back in my day" stories and tell kids to "get off my lawn"...

@Andrew Johnson ,  potentially could have worked but the real problem with the midwest properties was not fully understanding the unplanned expenses and how difficult it would be to find tenants.   In Phoenix, perhaps could have worked... we didn't explore this option because by then we had capital versus when we were just starting out, credit cards were our only source.   It's an interesting concept though if the numbers could work.  

@Nathan G. we were introduced to an experience hotel investor about a year before we moved forward with the hotel.  The numbers work like multifamily but the operations aspect is so different and we spent time learning from the experienced operator.  For example, avoiding kitchen service cuts down on a lot of variable operational costs.  Understanding which "flags" hotel brands offer the best marketing and support, etc.   It took us a year to make the jump...

What kind of ADR & Revpar rates are you looking at? Also, with the struggling CMBS market, how did you find the process of getting a loan?

@Nichole Stohler That is an awesome story and I thank you for sharing.  Your 3 points are spot on and folks definitely need to take those into consideration.  I see a 4th mistake to avoid in your post as well and thT is giving up too soon.  You could have said "screw this" after losing those 3 homes but you didn't and now you have an 80 unit hotel. Truly inspiring!

@Andrew Johnson

As for me APR% is not that important, for me is important time that I would spend from point A to B.

I was in about 200K of debt to run my trucking business 99K was credit cards with about 17%+

interest rates and I am happy that I did that)))

For me risk is ok if you have backup plan, and one more thing I never work more than 6 month out of the year ))

Isn't the hotel a lot more moving parts / headache than the 50 unit ?

@Aaron Ryan  it's true that there are more moving parts with hotels but it is not a bigger headache.  It's all about the team you have in place.  With the 50 unit I had an on-site Manager who could handle everything.  With the Hotel, I have an operations side that handles the day to day.

@Nichole Stohler hi and thanks for sharing your story. I have some questions. Where was the location in the Midwest at? So with the hotel you bought a franchise? What kind of fees did you run into? Was that your only property when you had the hotel? So how did you repair your credit and get your finances together during the struggle? Other than selling your homes once you owned them have you sold any other properties?

@Elbert Dockery , appreciate the questions.  Midwest location was a dying factory town in Indiana.  We didn't have to repair credit... we were in debt but we paid it back over time. We couldn't make money on those initial properties and had financed the down payments with credit card cash advances.   We gave back the properties as they were owner financed but we were stuck with the down payment debt.    We then got back into real estate 11 years later and the trade up looked like:  4 unit --> 7 unit --> 28 unit --> 50 unit --> 80 room hotel.

I am also a newbie to real estate investing and as I am from low background I sometimes fear of losing all my money. I took loan for a private owned property and the fear of losing came into my mind as my neighbor become bankrupt. But your story inspired me to never lose my heart in any condition.

@Lincoln Boland

absolutely!  Plus, there are so many more resources today to help you than there were when we were first starting.  Bigger Pockets wasn't around and we were naive about operational costs/expenses.   When the numbers work for a cash flowing property it is a different story.