Small Deals Mean Wasting Time & Making Small Money

203 Replies

For those of you who don't know me, I have been investing in real estate since 1999 and I have acquired about 3,000 apartment units (and houses) and I still own 1,000 apartment units today.

I also own 45 houses and several plots of land. And I buy hotels all over the country now.

My passive income in one month is more than what an average American makes in 1 year.

And knowing what I know now...here's my realization that may shock some of you:

Small deals (singe family homes and apartment buildings below 10 units) are not good because...

1.  They don't make as much money...

2.  Too much of a hassle for my team to manage (I have in-house property management and construction/renovation companies)...

and

3. Believe it or not, takes up MORE time to manage than the bigger deals

Good thing I transitioned over to bigger deals...specially hotels.

I mean, my latest hotel acquisition already made $160,000 in tax free income with a $1.7 MILLION investment in just 3 months! And I didn't really do anything.

No stress. This is really passive income. If I die tomorrow, my kids will gladly inherit hotels and they can run them because of professional hotel management and their franchised business model.

That's a true legacy.

In contrast, my houses and smaller apartments...at best, I can classify them as "semi-passive" income. My kids will not be able to manage them and maybe even hate me for even sticking them with "problems".

So, the sooner you can transition to BIG deals, the better.

If I get enough responses to this post, I will answer the question: HOW can one go from a small deal to a BIG deal in a hurry?

I will also gladly answer other questions you may have...

Who wants to go first?

I'll go first @Michael Ealy ! There are way too many people out there still pushing the "start small" boat, and scale up. I'm curious to know how someone with your experience would respond to that.

I don't disagree with you but I think comfort level plays a huge factor in why people choose SFH to start. The hassle is greater with SFH but I think the learning curve is shorter. Track record plays a factor as well. People can build their own track record easier with SFH compared to huge multi families. Lenders aren't willing to let you learn on their dime for the huge projects

Running is faster than walking but you have to walk before you can take off running and maybe most feel like walking is comparable to SFH. Just my 2 cents

Regarding multifamily vs hotels: most multifamily investors hire 3rd party property management, you may do so too. What do you do to manage your hotels? Are there 3rd party managers out there who will do that for you? Buying a hotel seems like a management headache that I might not be ready for, unless there's an option to outsource day-to-day operations.

By this logic every kid playing varsity basketball should quit today and join the NBA

Originally posted by @Yonah Weiss :

I'll go first @Michael Ealy! There are way too many people out there still pushing the "start small" boat, and scale up. I'm curious to know how someone with your experience would respond to that.

 Hi Yonah,

Great question. I guess the answer is "start small" is comfortable to people and it seems "logical". That's what the school system taught us - start elementary school, then middle school, then high school, then college...

But starting small has a tendency to keep you small. I know investors who started with single family homes the same time I did and they're still doing single family homes. One is a flipper - and he makes "good" money - about $200,000/yr but he works 16-hour days, 6 days a week. I work half of the hours he works and make a LOT more because I do big deals.

In contrast, I met a guy who has been in real estate investing 10 years (half of my years of experience) but he has acquired $1 BILLION worth of properties - and he jump straight to hotels. He makes a LOT more money than me because he does bigger deals and he didn't buy into the idea you have to start small.

The lesson is: you don't have to start small. 

Originally posted by @Effram Barrett :

I don't disagree with you but I think comfort level plays a huge factor in why people choose SFH to start. The hassle is greater with SFH but I think the learning curve is shorter. Track record plays a factor as well. People can build their own track record easier with SFH compared to huge multi families. Lenders aren't willing to let you learn on their dime for the huge projects

Running is faster than walking but you have to walk before you can take off running and maybe most feel like walking is comparable to SFH. Just my 2 cents

 You can start with a 4-family, not necessarily houses...OR...better yet, PARTNER up to do bigger deals.

You can skip first grade if you're smart enough.

Fortunately in real estate investing, copying others and working with others is not cheating. In fact, partnering is THE smart way to do real estate investing.

Originally posted by @Taylor L. :

Regarding multifamily vs hotels: most multifamily investors hire 3rd party property management, you may do so too. What do you do to manage your hotels? Are there 3rd party managers out there who will do that for you? Buying a hotel seems like a management headache that I might not be ready for, unless there's an option to outsource day-to-day operations.

 Taylor, I like your website - passive income - you and I don't believe in working too hard (LOL)...and hotel investing (done the right way) is MORE passive than apartment investing. Here's my analogy:

Hotel investing is to apartments as owning a McDonalds is to owning a mom-and-pop burger joint.

Hotel investing is actually more passive because:

1. You have TRULY professional management - in fact, when you are getting financing for a hotel, you won't get one unless you have 3rd party EXPERIENCED and professional hotel management. The managers of hotels just didn't attend a course like CCIM, they got a college degree on hotel management.

2. You also have the systems, marketing, branding and a global customer base of the flag or hotel franchise. The third party operator of the hotel needs to know/adapt/train their people with the flag's systems. If McDonalds can sell BILLIONS of hamburgers even with high school students as cooks/servers by using their systems, imagine what a Marriott's hotel system can do with college graduates - trained specifically on hotel management.

So...I don't do anything.

I am fortunate to have a hotel operator with over 35 years experience and have about $1.5B worth of hotels under management. They have 1700 employees all over the country - and this, plus the franchise-model, gives me the ability to buy hotels all over the country.

Originally posted by @Michael P. :

By this logic every kid playing varsity basketball should quit today and join the NBA


 No it's not the same. A kid needs to grow physically and his/her skills need to be honed over time.

In investing, you can partner up to get the skills and resources you don't have.

I've met people who started same time I did and they got stucked with houses - earning only $200,000 a year. There are months I earn over $200,000 and I don't even work that hard.

In contrast, I met a lot of hotel owners who started with hotels. One guy has $1 BILLION worth of hotels and he makes more money than I do and have been doing it for only 10 years (I've been investing for 20 years).

The school system has taught you to start small - like start with elementary school and work your way to college. But real estate investing is not like school. You can partner up and skip elementary school altogether.

Whatever you lack, someone else has it.

You lack money - you can partner up with people with money.

You lack PM skills, renovation skills, etc - there are people who know more than you - so why reinvent the wheel?

You are limited because you think you are limited.

Originally posted by @Michael Ealy :
Originally posted by @Taylor L.:

Regarding multifamily vs hotels: most multifamily investors hire 3rd party property management, you may do so too. What do you do to manage your hotels? Are there 3rd party managers out there who will do that for you? Buying a hotel seems like a management headache that I might not be ready for, unless there's an option to outsource day-to-day operations.

 Taylor, I like your website - passive income - you and I don't believe in working too hard (LOL)...and hotel investing (done the right way) is MORE passive than apartment investing. Here's my analogy:

Hotel investing is to apartments as owning a McDonalds is to owning a mom-and-pop burger joint.

Hotel investing is actually more passive because:

1. You have TRULY professional management - in fact, when you are getting financing for a hotel, you won't get one unless you have 3rd party EXPERIENCED and professional hotel management. The managers of hotels just didn't attend a course like CCIM, they got a college degree on hotel management.

2. You also have the systems, marketing, branding and a global customer base of the flag or hotel franchise. The third party operator of the hotel needs to know/adapt/train their people with the flag's systems. If McDonalds can sell BILLIONS of hamburgers even with high school students as cooks/servers by using their systems, imagine what a Marriott's hotel system can do with college graduates - trained specifically on hotel management.

So...I don't do anything.

I am fortunate to have a hotel operator with over 35 years experience and have about $1.5B worth of hotels under management. They have 1700 employees all over the country - and this, plus the franchise-model, gives me the ability to buy hotels all over the country.

 That's interesting, so if you're making this large return you must be buying at a pretty high cap rate or doing a lot of value add in the first year, right?

How do you form a relationship with the hotel operator and how are they compensated? I expect it differs significantly from multifamily.

@Michael Ealy Reading your bio I see you started out with a duplex. This is exactly what I would like to do within the next year. I am brand new to REI. I have a realtor, family that owns a remodeling company with connections to contractors, and multiple partners willing to invest. How can we grow as quickly as you did? Any help/information is greatly appreciated.

Originally posted by @Kris L. :

@Michael Ealy

Are you an owner of franchise hotels, or are they non-branded?

 Franchise

Non-branded can be profitable too but they're a lot of work (marketing, systems, management)

Originally posted by @Taylor L. :


 That's interesting, so if you're making this large return you must be buying at a pretty high cap rate or doing a lot of value add in the first year, right?

How do you form a relationship with the hotel operator and how are they compensated? I expect it differs significantly from multifamily.

The $160K in 3 months with only a $1.7M investment - well, the hotel was mismanaged and so when we took over, it was easy to create a lot of value just by through management efficiencies. We have not done our PIP (Property Improvement Plan) yet so we expect even a higher NOI boost once we did so. Also, I was expecting to put down $3M but got it reduced because the PIP qualified for PACE and our lender gave us an LTV that was higher than we were expecting.

They get a % of the revenue, a BONUS if they exceed our NOI target and a small ownership of the property.

Originally posted by @Eduardo Cid :

@Michael Ealy Reading your bio I see you started out with a duplex. This is exactly what I would like to do within the next year. I am brand new to REI. I have a realtor, family that owns a remodeling company with connections to contractors, and multiple partners willing to invest. How can we grow as quickly as you did? Any help/information is greatly appreciated.

 Partner up - start with a 4-plex that needs a value-add and this will be good because your family owns a remodeling company. So your cost of construction is lower to start - giving you a competitive edge. Then once you demonstrated success with a 4-plex, scale it up to a 20-unit then 100.

Originally posted by @Doug Pintarch :

@Michael Ealy Great post, I am taking it as encouragement and a practical example of going Large-Scale as soon as possible.  Still a "Small starter" here but we're working on ourselves and our portfolio!    Thank You!

That's great. In addition to "working" on yourself and your portfolio...you should be also be "networking" to find the right people and companies you can partner with. The KNOW-WHO is probably even more important than the KNOW-HOW.

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Originally posted by @Michael Ealy :
Originally posted by @Doug Pintarch:

@Michael Ealy Great post, I am taking it as encouragement and a practical example of going Large-Scale as soon as possible.  Still a "Small starter" here but we're working on ourselves and our portfolio!    Thank You!

That's great. In addition to "working" on yourself and your portfolio...you should be also be "networking" to find the right people and companies you can partner with. The KNOW-WHO is probably even more important than the KNOW-HOW.

You hit that nail on the head.  We've been finding that out for the last 2 years that we've had our rental.  Rolodex is getting filled and "Massaged"!    

 

While I agree 100% with this post, telling people not to limit themselves is like telling Neo in the matrix to "free your mind".  He couldn't just manifest his true potential by being told about it, he had to see incremental evidence along with constant reinforcement to realize it.  No doubt partnering with an experienced investor is HUGE, but we don't all have the luxury of a Morpheus tracking us down to show us the way. How can beginning investors with limited experience (especially with time constraints due to family and work) who are willing to work hard get the attention of the bigger players? Sorry for the heavy matrix analogy, it just worked for this example.

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Michael,

Thank you for the encouragement. I see the logic in it but by nature I am wired more conservatively so starting "small" is the way I'm going.

I have a sfr rental. In my mind, I have acquired the skills and experience to move into tier 2: a small multifamily or mobile home park. After that, I'll do the other of the tier 2.

After 2 comes tier 3. Not sure what that is yet. Logically, it's short term rentals.

I don't know if I even want to progress into anything larger than small multi. I'd be perfectly content with quality cash returns over a larger quantity of mediocrity.

If I wanted to own a hotel, this path would be different.

That being said, keep posting, I learn a TON from your insightful posts!

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