Small Deals Mean Wasting Time & Making Small Money

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

@Michael Ealy

I have a question- is the first 3/4 of this post supposed to be an ego boost? Not trying to be rude, and it’s obvious you have done well for yourself, but some of us are more that happy owning SFRs and small multis. I mean, some of us have done pretty well with SFRs, maybe not a years salary in a month but...

11 Reply

Judy Parker

Rental Property Investor · Closter, NJ · Member since 2015 · 884 posts · 722 votes

6y

How do you get financing for those big deals?

2 Reply

Michael H.

Rental Property Investor · Houston, TX · Member since 2017 · 144 posts · 42 votes

6y

@Michael Ealy

I am house hacking and about to buy my second house hack.

How can a little guy with 2 cashflowing SFH's just into multis and big deals?

I hear big fish say all the time "just go big" but I cant find anyone who actually started big. The big guys seems to have all started small and then sold off the little stuff.

Before I leverage myself into more SFH and eat up all my DTI what should I consider?

2 Reply

Michael Ealy

OP

Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

6y

Originally posted by @Alma Mills:

Love this post, I was just telling a friend the same thing yesterday. I'm just not interested in small deals anymore. Part of the reason is we bought a duplex in Cincinnati around the same time as a 22 unit apartment complex in the same area. The work and hassle involved in the two was almost the same but the reward was far superior from the apartment complex.

That said, it is very hard to start big due to the need for capital, and everything seems to cost more when your doing commercial property ($4000 appraisals!). The strategy I find best is keep improving, maybe start with 1 to 4 units to show investors/partners you can do this. Then scale up. Don't keep doing Single family just because it's easy.

I would like to do 100 unit+ on my next deal.

Alma,

Thanks - I love your reply. I am glad somebody else find the same thing: 2 units have the same hassles/work as 22 units but with a lot less profit :)

And yes, that's the downside of bigger deals - just to secure them takes a lot more money than smaller deals. This is where partnering comes in. "Soft" costs like appraisals and legal fees don't have to come from your pocket.

You don't have to do everything yourself. Having said that, finding the right people to partner with is crucial.

0 Reply

Eli Gilbert

Investor · Cleveland, OH · Member since 2019 · 103 posts · 22 votes

6y

@Michael Ealy

Hey Michael!

Thank you for being such an inspiration to all us Newbies!

I can understand that the work is the same etc, but the funding problem, I can’t wrap my head around, no bank would find a Newbie for a big deal unless they have massive amounts of capital, and why would an experienced investor want to partner with a Newbie, and why would an investor trust a Newbie with there money when they could just as easily give there money to someone like you that would almost guarantee their good returns!?

2 Reply

Michael Ealy

OP

Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

6y

Originally posted by @Joe Splitrock:

@Michael Ealy what type of percentage cash investment and cash reserves does it require to purchase a hotel. Can you give a specific recent example or general rule of thumb?

What do you say to people who claim hotels are dead due to STR? (I don't agree but curious on your opinion.)

I currently invest in single family homes, but I have had small multifamily in the past. I completely agree with your statement that anything under 10 is just small. I don't see that 2 or 4 units is scale of any value. What size apartment complex do you think is enough scale to give you some advantage?

What are your thoughts on current cap rates of apartment complex? They are lower than historic levels, so do you see a problem with that?

Joe,

the graphic below captures the kind of capital requirements needed to invest in hotels compared with apartment buildings and houses. Of course, this is an oversimplification because as you know it depends on the deal:

To answer your next question...

I prefer at least 20 units in order to achieve some scale. 50 units and you can hire a part-time property manager and part time maintenance personnel. Double that and you can afford full time PM and Maintenance.

And to answer your last question...apartment cap rates being historically low...YES, that's concerning. So, I don't buy anything unless there's a value-add opportunity and ability to increase rents substantially. I don't really buy apartments for cashflow - I buy only if I can force the appreciation - increase the value significantly, sell (or 1031) or refi, get cash and move it to a bigger deal. I combine buying properties with value-add to buying in locations that are moving up (C/D moving to A/B). Lastly, I am very conservative with my projections - I am adding 100 basis points to the market cap rate today and assume that as my cap rate when I exit. If I can't exit profitably at a higher cap, then I don't do the deal.

Example: if the market cap rate is 7%...I assume my exit to be 8% cap.

And I forgot to mention that I also assume my interest rate to be (50 basis points) higher than today...and if the property won't cashflow, then I don't do the deal.

4 Reply

Michael Ealy

OP

Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

6y

Originally posted by @Matt M.:

@Michael Ealy

I have a question- is the first 3/4 of this post supposed to be an ego boost? Not trying to be rude, and it’s obvious you have done well for yourself, but some of us are more that happy owning SFRs and small multis. I mean, some of us have done pretty well with SFRs, maybe not a years salary in a month but...

I am just adding perspective to the question being asked. BP has over 1 MILLION members and 99% of them likely don't know me.

I see some newbies who have not done a deal who wants to syndicate an apartment deal and they want to do it by themselves. The answer to a newbie's question like that will be different vs. someone like me who has experience and sharing what I realized.

And sure - you can be happy with SFRs and small multi's. I am just sharing that the work is the same and small deals take up too much valuable time that can be devoted to bigger deals (with bigger profits and ironically LESS work).

7 Reply

Scott Mac

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

6y

@Michael Ealy

Hi Michael,

I know of guy who did pretty well for himself with Hotels--ended up winning the vote for the Presidency.

I have a feeling you're on your way to some big dollars with this effort.

How did you (meet) line up investors that were interested in Hotels (or did you educate them on it)?

Good Luck!

3 Reply

Michael Ealy

OP

Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

6y

Originally posted by @Eli Gilbert:

@Michael Ealy

Hey Michael!

Thank you for being such an inspiration to all us Newbies!

I can understand that the work is the same etc, but the funding problem, I can’t wrap my head around, no bank would find a Newbie for a big deal unless they have massive amounts of capital, and why would an experienced investor want to partner with a Newbie, and why would an investor trust a Newbie with there money when they could just as easily give there money to someone like you that would almost guarantee their good returns!?

Eli, thanks - finally some hard questions for me to answer :)

Experienced investors are always looking for 2 things:

1) Funding; and 2) Deals

If a newbie investor will help me do 1 of 2 (or both) things above, I will gladly partner with him/her.

If I am starting over, I would:

1) Learn how to invest with MF (skip the houses) from experienced investors, starting with my market

2) To help with #1, network like crazy - because KNOW-WHO is even more important than KNOW-HOW

4 Reply

Matt M.

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

6y

@Michael Ealy

Thanks for your response. I'm not a newbie, but not all of us have the ability to fund huge deals and not everyone wants to partner. Personally, if I can't buy something myself, I don't want it, I've seen way to many partnerships (not just in RE) go south. I feel like by saying go big or go home, it's giving newbies false hope and setting them up for failure. It's like when people post- I have $1000 how do I get into REI? You don't, you only have $1000. But then there's people who will give 10 ways to do it, then guess what happens, they need $5000 for a furnace and are screwed and broke and have a tenant with no heat. I guess I'm just a realist. I prefer single family houses, I can rehab myself, and have close friends in every aspect of construction if need be. if something in my life requires money I don't have, I can throw one on the market. $100k house will sell way quicker than a $2mil apt complex. And the old saying of "it takes money to make money" plays here also. I can't come up with $100k cash, but I can figure out how to buy SFRs.

9 Reply

Stephen Wilson

Member since 2019 · 7 posts · 7 votes

6y

@Michael Ealy

Michael, does that mean you find the properties and then partner with a franchise hotel chain, so you can use their name recognition? Then split ownership

(or retain ownership) and profit share? How exactly does the transaction occur? If you don’t mind sharing details? Also, do you partner with other investors that can bring deals to you?

2 Reply

Anna Villalobos

Member since 2019 · 26 posts · 16 votes

6y

@Michael Ealy

Thank you so much for your insight, as someone that is much further down the road than I. And absolutely! That was my first question . . . How do I go from smaller to bigger? Is there an important learning curve I would be missing by doing so?

I look forward to hearing more!

1 Reply

Ranga Ramanathan

Investor · Lake Zurich, IL · Member since 2017 · 38 posts · 14 votes

6y

@Michael Ealy

Congrats on your success. As a passive investor I view buying single family just as buying stocks once i give it to the property manager I am done. Not every body wants to deal with all the things that come with larger deals.

Everybody can own Apple stock not everybody want to own a company like Apple or run a hedge fund, more power to people like you who can make it happen!!!

2 Reply

Michael Ealy

OP

Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

6y

Originally posted by @Scott Mac:

@Michael Ealy

Hi Michael,

I know of guy who did pretty well for himself with Hotels--ended up winning the vote for the Presidency.

I have a feeling you're on your way to some big dollars with this effort.

How did you (meet) line up investors that were interested in Hotels (or did you educate them on it)?

Good Luck!

Hi Scott, did that guy's name rhyme with "bump"?

I started with my existing apartment investors and yes - I had to educate them on hotels.

1 Reply

Darren Pacheco

Member since 2019 · 1 post · 14 votes

6y

Having a been a commercial mortgage guy for 15 years, and financing a variety of commercial property types...here is my two cents. Hotels are often boom and bust, they have incredible upswings during periods of economic growth (think business/recreational travel). They can take a big hit during recessions. Most people who have been "investors" over the last 10 years, should have done great to excellent (if they know what they are doing). We've gone from all time lows to all time highs, during this period. With that said...finding value-add hotels deals can be very profitable. The play is acquiring a non-flagged property, putting in cap ex (via PIP), rebranding with a known "Flag," then refinancing out your equity after stabilization.

With that said hotels like self-storage are a business/real estate play, not just real estate. So you really need to understand how the business models works.

14 Reply

Brian Ellis

Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes

6y

@Michael Ealy I agree with you. But In an expensive market it can be pretty tough to get started with more units.

For me, it has been extremely difficult to "scale". Ive been able to take advantage of the owner occupy fixer upper. But other than that it is just way out of my league to invest in commercial space, although id love to.

My question to you is: How would you go about networking to find partners and other investors? Or do you think staying the course and continue to grind for now is the way to go? I only have a few years experience at this point.

Thanks!

2 Reply

Patrick V.

Specialist · Miami, FL · Member since 2019 · 63 posts · 10 votes

6y

@Michael Ealy what an awesome inspirational post Michael thank you.

1 Reply

Michael Ealy

OP

Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

6y

Originally posted by @Matt M.:

@Michael Ealy

Thanks for your response. I'm not a newbie, but not all of us have the ability to fund huge deals and not everyone wants to partner. Personally, if I can't buy something myself, I don't want it, I've seen way to many partnerships (not just in RE) go south. I feel like by saying go big or go home, it's giving newbies false hope and setting them up for failure. It's like when people post- I have $1000 how do I get into REI? You don't, you only have $1000. But then there's people who will give 10 ways to do it, then guess what happens, they need $5000 for a furnace and are screwed and broke and have a tenant with no heat. I guess I'm just a realist. I prefer single family houses, I can rehab myself, and have close friends in every aspect of construction if need be. if something in my life requires money I don't have, I can throw one on the market. $100k house will sell way quicker than a $2mil apt complex. And the old saying of "it takes money to make money" plays here also. I can't come up with $100k cash, but I can figure out how to buy SFRs.

Thanks Matt for sharing your perspective. And I agree: partnerships can go south. I went through a partnership that cost me about $100,000 so I know what you mean.

Having said that, not all partnerships are bad. I believe in leverage - and leverage is not just borrowing 80% from the bank and putting down the rest. Leverage is using other people's resources - time, money, credit, networth, network, knowledge, expertise, experience, credibility, etc - to achieve what you want. But leverage is a 2-way street: for you to leverage on others, they have to leverage on you.

And yes - newbies might have the wrong impression that only big deals are profitable. Of course that's not the case. All I am saying is that people have limited themselves to thinking they have to start one way when there are other ways to start (and can be more profitable with less work).

Also, big deals is relative. A 4-plex can be a big deal for one but small for another and it depends where you're located in the country too ($1M house in California is a small deal but a big one if you're in Ohio).

After doing small deals and big deals - I am so glad I did big deals even when it felt uncomfortable. I am glad that even though I got burnt in a partnership before, I didn't let that stop me from partnering with the right people. The right partners have literally made me MILLIONS so my -$100K loss with one bad partnership deal - I consider that my tuition fee :)

2 Reply

Anthony GaydenPro Member

Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes

6y

Originally posted by @Michael Ealy:

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?

You have quite an impressive bio. It sounds like you have been quite successful. I understand your logic in that the bigger deals are less of a hassle and I agree.

I don't have any questions for you, but I just wanted to say that I respect and admire your success and that you are proof positive that opportunity is out there for everyone.

Podcast Guest on Show #21

2 Reply

Eli Gilbert

Investor · Cleveland, OH · Member since 2019 · 103 posts · 22 votes

6y

@Michael Ealy

Sounds good, although not everyone I’ve encountered has that attitude towards us Newbies!

What are some resources you suggest for bigger deals!?

I’ve been trying to educate myself on the smaller side!

Books, webinars, podcasts?

Obviously REI meetups and networking, , but just basics of how big RE works , cap rates , Noi! Etc

1 Reply

Matt DeBoth

Rental Property Investor · Carroll, IA · Member since 2017 · 63 posts · 53 votes

6y

@Michael Ealy love this post. Couldn’t agree more.

2 Reply

Matthew Terry

Rental Property Investor · Mesa, AZ · Member since 2019 · 138 posts · 144 votes

6y

Originally posted by @Michael Ealy:

Originally posted by @Stephen Wilson:

@Michael Ealy

Michael,

Can you tell us how many deals you've done with inexperienced partners to get to where you are today and tell us about the most recent deal you made with someone new to real estate investing? What made you decide to incur greater risk with these partners instead of mitigate risk by partnering with experienced and successful investors?

I think this would lend greater credibility to your message and motivate new investors like myself more than stating you know a guy who has $1B in hotels in 10 years.

6 Reply

Michael Ealy

OP

Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

6y

Originally posted by @Anna Villalobos:

@Michael Ealy

Thank you so much for your insight, as someone that is much further down the road than I. And absolutely! That was my first question . . . How do I go from smaller to bigger? Is there an important learning curve I would be missing by doing so?

I look forward to hearing more!

Anna,

Decide for yourself what you're comfortable with and add/double it.

For example, let's say you want to start with a duplex.

Instead - push yourself to start with a 4-plex. That's BIG for you.

Focus on 4-plexes that can add value to - increase the rents by improving management and improving the building. Once you improve the building's financial performance, its value increases - in other words, you are forcing its appreciation.

You can then sell (or 1031 so you don't pay taxes) or refinance your cash out, then move that cash to a bigger property - say 20 units.

Then do the same thing with the 20-units and then move on to 100 units.

5 Reply

Jeff C.

Real Estate Broker · Bakersfield, CA · Member since 2018 · 269 posts · 597 votes

6y

Originally posted by @Matthew Terry:

Originally posted by @Michael Ealy:

Originally posted by @Stephen Wilson:

@Michael Ealy

Michael,

Can you tell us how many deals you've done with inexperienced partners to get to where you are today and tell us about the most recent deal you made with someone new to real estate investing? What made you decide to incur greater risk with these partners instead of mitigate risk by partnering with experienced and successful investors?

I think this would lend greater credibility to your message and motivate new investors like myself more than stating you know a guy who has $1B in hotels in 10 years.

The kind of inexperienced partners he has in mind are the kind that will hand him their money to fund his deals. No increased risk with that plan.

3 Reply

Trent Chance

Member since 2019 · 94 posts · 75 votes

6y

@Scott Passman

The matrix is amazing.

I followed @Michael Ealy s advice a few months ago before I even met him. I just read his posts and managed to get him on the phone once. I started negotiating a 35 unit deal with no idea how I'd close it.

Around that time I went to a seminar in my hometown and had a partner in 48 hours.

"There is no spoon."

3 Reply

Small Deals Mean Wasting Time & Making Small Money

Small Deals Mean Wasting Time & Making Small Money

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