Small Deals Mean Wasting Time & Making Small Money

Anthony Wick

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

6y

@Michael Ealy

It’s great that you are so successful. But I am going to give your post one big eye roll.

5 Reply

Chris Lockwood

Kansas City, MO · Member since 2019 · 7 posts · 10 votes

6y

@Michael Ealy I am just starting out in investing and have a similar goal in mind. I find myself looking to the future deals amd mapping out how I will get there. Reading your story would be great.

1 Reply

Junior Soares

Contractor · San Jose, CA · Member since 2018 · 262 posts · 407 votes

6y

@Michael Ealy

Good morning Michael,

This is certainly my goal. I'm just marinating a bit on my current smaller properties so I can make a smart 1031 exchange in the next 5 years into a larger 20+ unit in San Antonio.

Our current situation:

Currently live in the Bay Area and will be relocating my family to Austin, TX. (Home already purchased in January)

Our property here in the Bay Area has been serving as a rental and we've been living with my wife's parents as we save money to invest in some more deals before we move. We currently have just north of $300k in equity in our Bay Area Home alone.

The goal:

In the next 5 years sell the Bay Area home and 1031 Into a 20+ unit in San Antonio. These next 5 years will be spent analyzing what areas of SA I'd like to invest in since it will be 40 minutes south from my home.

We also have a quad in Austin that we acquired this year that I plan to condolise in the next 5-7 years and sell off each unit as our neighbor did across the street in North Austin, I too plan to 1031 this deal into a second large multi family property and then grow from there.

Also have a few properties in the midwest that I'm having the tenants pay down that will eventually turn into sales and 1031 conversions into other deals.

Thoughts on my 5 year plan? Good plan? Bad plan?

We currently have plenty of reserves for our properties (6 months total for all combined properties for full total income) with a separate cash reserve to aquire a deal once the right one presents itself

Best,

Junior

1 Reply

Brandon Wells

Property Manager · Indianapolis, IN · Member since 2018 · 136 posts · 71 votes

6y

@Taylor L. A lot of hotel owners also hire 3rd party Management companies.

1 Reply

Brandon Wells

Property Manager · Indianapolis, IN · Member since 2018 · 136 posts · 71 votes

6y

@Michael Ealy Love the thought process and it is a popular one. Most, if not all, RE investors recommend this train of thought.

I always love to look at stuff from multiple angles and play devils advocate. In doing so, I have a few questions.

1) Starting out with your "small deals" how much credit would you give to them in getting you to your current position? If you didn't have the cash flow, depreciation benefits, appreciation on sale (potentially 1031 on sale) coming from those small deals, how much longer do you think it would of taken you to get to your current position?

2) Would you of had the operational experience to manage your large deals, if you didn't start with learning the operational items on your small deals?

3) Do you think if you would of started "big" from the jump you would of been hindered by the mistakes costing more and having a bigger impact then those same mistakes did on the smaller deals you started out?

I think it goes without saying that the majority of people preaching this thought process, started with smaller deals and have been able to grow to their currently level of success/knowledge from them. I hardly see anyone crediting what they learned from those small deals into being a major factor in their current success.

1 Reply

Emeka Attoh

Realtor · Houston, TX · Member since 2019 · 4 posts · 2 votes

6y

@Michael Ealy this goes with the same principle that it takes the same effort to sell a million dollar house and a 200k house. Having said that, can a beginner jump into large deals? 1999 - 2019 is 20years. So, you got a lot of experience.

0 Reply

Shuang W.

Investor · Austin · Member since 2019 · 26 posts · 16 votes

6y

May I ask which part in north Austin you’ve got the quad @Junior Soares ? I live in Austin and has been investing in single family in the past, and would love to broaden my knowledge on multi-family. Thanks!

0 Reply

Ron Gantt

Investor · Chino Hills, CA · Member since 2019 · 6 posts · 0 votes

6y

Originally posted by @Mary M.:

@Michael Ealy - i missed this thread entirely..... i have 10 class B units now and would love to figure out how to safely leverage what I have to create more.... its a bit challenging here as CAP rates are around 5%....

Hi Mary - I’m bummed I missed the webinar too.. Have you thought about using portfolio lenders? This may do the trick in getting you into a larger deal! I would love to help with underwriting....

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

6y

Originally posted by @Brianna M.:

@Michael Ealy

You’re handling the haters quite well. I’m appalled by some of the replies here. Some of the negativity and skepticism I’m seeing from some commenters really speaks to their own insecurities in my opinion than anything related to your post.

Since when is it not okay to talk about and be proud of your own accomplishments? Especially in a post where you’re trying to encourage others and add value to the BP community.

Thanks for the inspiration and advice, Michael!

Brianna i am going to take a shot at this.. BP is a funny place and there is a fine line between talking about what you do and how to do it and Self promotion which is not allowed.. its done every day everyone does it in some subliminal manner here on BP you have the cut and paste artist or those that ONLY talk about what they do.. I mean we are all in the business and most all of us that are developers / builders/ syndicators are always looking for new money etc..

So thats why you have some of the negative responses i suspect I don't know for sure but i suspect some of those folks took this post as more of an advertisement or self promotion piece..

I have followed Michael and enjoy him talking about his projects.. the lower end apartments he has done I would not personally touch ever not my strong suite.. Hotels seem to be a new thing for him and that to me like said above is just a different business its not land lording per se its being a Hotelier.. And all that it involves IE staff and such.. They can be great investments especially smaller ones that are owner operated if you have ever been in a Patel owned one. you will see its run with family and close associates.. Kind of like going to the local Chinese restaurant..

So just like all value add real estate that means the last owners ran it into the ground plenty of folks fail at hotels.. other wise there would not be value add opportunites.. demographics change lots of things can happen in that industry just like any industry.. and for sure burnt out landlords create opportunity for new blood coming in.

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2 Reply

Dave Steadman

Fort Lauderdale, FL · Member since 2016 · 22 posts · 8 votes

6y

Michael ealy. I really enjoy your post. Its truly inspiring to see a face to this level of wealth. I'm convince single family is tedious process in the pursuit of wealth building. but I can't complain because I'm averaging 15 percent or more in returns. I have yet to see the incentive to transition in the unknown call multifamily. But I'm really proud of u. Big up and God's blessings

1 Reply

Alyssea Sago

Specialist · Cincinnati, OH · Member since 2016 · 12 posts · 5 votes

6y

@Michael Ealy a lot of gems in this comment alone. Thanx for sharing!!

1 Reply

Jon S.Pro Member

Investor · Tampa, FL · Member since 2015 · 530 posts · 92 votes

6y

@Michael Ealy

Sounds right to me. So the question is, how does one transition from small deals to large deals?

0 Reply

Judy BestPro Member

Investor · Little Rock, AR · Member since 2017 · 81 posts · 62 votes

6y

Our single family business has all been in Central Arkansas, but we may have to wonder a little further from home to find multi-family deals. As I said, that's our next goal, and we've been staffing for that, so we're just now looking for deals. Finding some locally, but as we span out to college towns in Arkansas and Missouri, more deals are available. We'll see!

1 Reply

Account Closed

Mandan, ND · Member since 2017 · 42 posts · 64 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?

Mr. Ealy, what is your angle?? Inquiring minds would be interested in knowing.

0 Reply

Michael Ealy

OP

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

6y

Originally posted by @Erik W.:

@Michael Ealy...

20 units is 5 times bigger than anything I've ever done. Up until now, all SFH's, a handful of duplexes,and a 4-plex. If it goes well... I'll go bigger. I'm comfy with a combination of whatever makes a profit at the numbers we're talking. 50 units...100 unit...more? Comfort comes from know my numbers and market backwards and forwards, so honestly I can't say there's ANY size of deal I'd NOT be comfy with based on size alone. I'd do 1,000 units at a shot if it penciled out and I could get the capital raised.

Money partners. One is a relative who I did deals with in the past. The other is an associate of a friend. We met for breakfast last Saturday and I introduced him to the deal I was tracking. He was excited and wanted in for six figures. Works for me!

Congrats Erik. Raising capital is not that hard. It's a matter of being referred to and talking to the right people.

0 Reply

Michael Ealy

OP

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

6y

Originally posted by @Brianna M.:

@Michael Ealy

You’re handling the haters quite well. I’m appalled by some of the replies here. Some of the negativity and skepticism I’m seeing from some commenters really speaks to their own insecurities in my opinion than anything related to your post.

Since when is it not okay to talk about and be proud of your own accomplishments? Especially in a post where you’re trying to encourage others and add value to the BP community.

Thanks for the inspiration and advice, Michael!

Thanks Brianna for being positive. The world needs more people like you :)

0 Reply

Michael Ealy

OP

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

6y

Originally posted by @Brian Ploszay:

Going big is not an option for the far majority of people on bigger pockets. First, it takes the ability to raise larger amounts of capital and syndicate deals. And most money doesn't want to invest with someone without a track record. Usually, those who get to that higher level were working for investors and developers in their early years, gaining valuable experience. For example, someone who worked for an apartment REIT or investment group that held thousands of units. But you'd be surprised that there are those who started from a lower level and accumulated over time. There are many different paths...

I find that the larger deals (non institutional) are very sought after by groups, whose business model is heavily dependent on the fees that they generate for themselves: Acquisition fee, development fee, management feet, percentage of the deal. Or percentage of the upside. Disposition fee. The successful folks are really skilled dealmakers and operators. Many hats you have to wear.

The highest quality large deals are funded / invested by institutional capital, which entrepreneurs, outside of developers, can't compete with. Reits, pensions funds, Family office money. These are the groups that pay the most aggressive prices for top notch quality assets. They are not on bigger pockets...

You can shoot for bigger deals. But for me, it is important to "know what you don't know." I therefore would never be a lead investor in hotel and office deals.

Be careful with the loans you take out. Medium sized deals - such as a 30 unit apartment building or a strip center, often have full recourse loans. A poor performing property can result in a financial wipe-out. Everyone at this level should target non recourse loans.

You are right Brian - 99.9% of people here on BP can't start BIG right off the bat. In fact, the point of my post is to encourage people to scale up as soon as they can to do bigger deals. So, that means they start with a smaller deal then as they gain experience and capital, scale up.

As to how soon they can do that, it depends on their situation, goals and existing resources.

The human tendency is to stay at a level that you're comfortable with. I know of investors who started the same time as I did who are still making the same amount of money and they complain that they are working too hard.

The other human tendency is to think that bigger deals are necessarily riskier than smaller ones. That's not always the case. As you said, the middle-sized deals have full recourse loans while the bigger sized deals have non recourse loans.

The post has opened the eyes of many people here and it has done its job.

0 Reply

Michael Ealy

OP

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

6y

Originally posted by @Mary M.:

@Michael Ealy - i missed this thread entirely..... i have 10 class B units now and would love to figure out how to safely leverage what I have to create more.... its a bit challenging here as CAP rates are around 5%....

Hi Mary,

One thing I do to scale up faster is to buy properties which are cashflowing already but the income can be increased through increasing the rents/decreasing the expenses. By doing this, the value increase is huge and I can pull out the capital to buy another deal and do it all over again. It's basically BRRR but with apartment buildings and hotels.

1 Reply

Michael Ealy

OP

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

6y

Originally posted by @Dominic Balli:

For what it’s worth Michael, I appreciated the accolades at the beginning. I don’t know you, so it made me tune in. And maybe you’re looking to raise money from this post. Maybe not. Not sure it matters honestly. Either way you brought something of value to the table. For that I’m grateful. And honestly, I’m not sure why the certificate thing even matters if it’s legit or not. You’re obviously providing housing for the city. You’re making money the way you want to. You’re even taking time to reply to people on here buying quads on here, not hotels. I Doubt they’re your “target market” for your next syndication. Anyways, just letting you know some (most) of us appreciate this post.

Lastly, on a personal note, I'm an out of state investor from CA about to buy my first SFH or duplex, but I was only doing that and not a quad because I thought I "had to" start like that. Truth is my risk tolerance is higher and a duplex feels easy. A quad is a doable stretch. So thanks for that - for calling me UP.

Thanks Dominic for the encouraging words. This world needs more positive people like you.

I started with a duplex 20 years ago. So you can start where you're comfortable but my advice is scale up as fast as you can. Again, the point of the post is to show that bigger deals don't necessarily mean bigger risks or doing more work. In fact, smaller deals sometime produce more work and the profit is significantly less.

Study BRRR (Buy-Rent-Renovate-Refinance). I was doing BRRR even before the term was invented here on BP. It allows you to scale up because, in theory you can buy as many properties as you can even with a limited starting capital.

Also research value-add strategy for apartments and commercial properties (BRRR is basically value-add but it's not called that in the apartment/commercial real estate investing space). I don't buy any house, apartment or hotel unless I can do a value-add, specially in this market. Doing a value-add means the income from a property will increase substantially which means the value of your property will increase even more significantly.

For example, let's say you have a 20 unit building and it's in a market where the cap rate is 5%. If you can increase the net operating income of that building by just $100/month per unit, the increase in value is HUGE. Here's the math:

$100/mo/u x 20 units x 12 = $24,000

$24,000/yr additional income divide by 5% = $480,000

You just increased the value of the building by almost half a million dollars. You can then refinance or sell (1031) to pull that cash out and use that to buy a 50 unit building for example.

This strategy is the reason why, even though I lost everything back in 2002-2003, that I was able to recover from that and build a portfolio of 1,000 apartment units today.

3 Reply

Michael Ealy

OP

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

6y

Originally posted by @Leandro Zhao:

@Michael Ealy Thank you for your post!

So what can I do to start buying an apartment complex? There is a great deal of a 23 unit complex for 2.3M that can potentially achieve the 1.5% rule.

I don't have this kind of money and to partner up would be hard because I don't have that much experience to bring to the table.

What is your suggestion for me to get that property as a beginner?

Leandro,

As we discussed via PM, the key is to first get the KNOWLEDGE on what a good deal looks like.

$2.3M for 23 units could be a good deal or could be overpriced. It depends on the cap rate of the area and the age of the building. You also need to factor the renovation the property needs if any.

Since you said it follows the 1.5% rule, that means your monthly rent is $34,500/month
Calculation: $2,300,000 x 1.5% = $34,500/month

The age of the building will determine the expense ratio. For instance, if the building is newer (say less than 20 years old), the expense ratio is as low as 40% but if it's an older building (more than 60 years old), the expense ratio can be as high as 60%.

For now, let's take the middle - 50%. So that, your net operating income per month is:

$34,500 (gross rent) x (1- 50% expense ratio) = $17,250/month or $207,000/yr

If the cap rate for similar properties in the area is 10%, the value of the building is:

$207,000/ 10% cap = $2.07 Million , meaning the property is overpriced

But if the cap rate for the area is 5%, this is an awesome deal because the value is $4.14 Million.

Cap rate is dependent on the area/location - the better areas have lower cap rates and bad areas have higher cap rates.

Bottomline: the analysis is as straightforward as 1% rule should be good deals.

Makes sense?

3 Reply

Trent Chance

Member since 2019 · 94 posts · 75 votes

6y

@Jeff Cagle

Jeff you getting a little jealous or what's really going on here?

Did you lose a bet on a shady businessman and project it on to Mike?

I've personally been apart of and witnessed him PROVIDE the capital to help a newer investor do a deal. I've even seen him provide the deal and commission.

Does he raise money also? Of course he does. All his articles tell us that we should be as well.

If he's trying to be sneaky he ain't very sneaky!

GL with your anger.

1 Reply

Bridgette Stokes Conner

Centerville, GA · Member since 2018 · 5 posts · 0 votes

6y

@Michael Ealy

How many responses is enough? Seriously! How many boxes of Wheaties does a newbie have to eat to be convinced to start BIG?

0 Reply

Jeff C.

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

6y

Originally posted by @Trent Chance:

@Jeff Cagle

Jeff you getting a little jealous or what's really going on here?

Did you lose a bet on a shady businessman and project it on to Mike?

I've personally been apart of and witnessed him PROVIDE the capital to help a newer investor do a deal. I've even seen him provide the deal and commission.

Does he raise money also? Of course he does. All his articles tell us that we should be as well.

If he's trying to be sneaky he ain't very sneaky!

GL with your anger.

I'm going to take a wild guess here and say you're relatively green in this business. The opinions on what's going on here seem to fall into two camps: The old seasoned dogs on one side, and the green newbies who are hypnotized by razzle dazzle and incapable of discerning BS on the other. Believe me, my PM's have been swirling since I dropped in on this thread, and some of the best known most well respected members of this board have said things along the lines of "thank god somebody finally said It!".

As for me, no I haven't been taken by any "shady businessmen". I know them when I see them, and even point them out to others.. right here on BP! While I've neglected to preface every one of my posts with my curriculum vitae (a practice I find to be excessively gauche), believe it or not I've actually managed to do just fine in this business.

3 Reply

Trent Chance

Member since 2019 · 94 posts · 75 votes

6y

Originally posted by @Jeff C.:

Originally posted by @Trent Chance:

@Jeff Cagle

Jeff you getting a little jealous or what's really going on here?

Did you lose a bet on a shady businessman and project it on to Mike?

I've personally been apart of and witnessed him PROVIDE the capital to help a newer investor do a deal. I've even seen him provide the deal and commission.

Does he raise money also? Of course he does. All his articles tell us that we should be as well.

If he's trying to be sneaky he ain't very sneaky!

GL with your anger.

I'm going to take a wild guess here and say you're relatively green in this business. The opinions on what's going on here seem to fall into two camps: The old seasoned dogs on one side, and the green newbies who are hypnotized by razzle dazzle and incapable of discerning BS on the other. Believe me, my PM's have been swirling since I dropped in on this thread, and some of the best known most well respected members of this board have said things along the lines of "thank god somebody finally said It!".

As for me, no I haven't been taken by any "shady businessmen". I know them when I see them, and even point them out to others.. right here on BP! While I've neglected to preface every one of my posts with my curriculum vitae (a practice I find to be excessively gauche), believe it or not I've actually managed to do just fine in this business.

You act like real estate experience has anything to do with common sense. I manage a lot of people money, vendors and contracts in my field and see snake oil everyday. The difference in you and I isn't real estate experience - it's I've spent time digging in, talking with, visiting with, meeting partners of and seeing "green newbies" make money with the man and you have not.

Appreciate the new word though - "gauche" I'm going to memorize it and put it in a sentence :)

I think a good approach to these scenarios is a response like

"Hey BP - Mike is very inspiring with these articles but we have had scam artists on BP many time so make sure you do your homework."

Instead of demonizing someone you don't know. Is he marketing? Sure. Is he breaking a forum rule? I don't know or care - that's for the mods to decide. Is he scamming people??? I sure haven't seen anyone provide anything that remotely points to anything shady. He's been nothing but helpful to me even though I decided to make it clear up front that my personal cash is and will be in my personal deals.

3 Reply

Account Closed

San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes

6y

I love the word reasonable. Is it reasonable to believe that someone who owns thousands of properties and numerous hotels would:

1) have time to post on BP or care about posting on BP?

2) not be trying to sell something?

And if #2 is the case, could they really be as successful as they claim to be?

Just using the old noodle here and asking - does that make sense to you? AKA - does it sound reasonable?

My answer is: no, it doesn't make sense at all, hence, I would not believe what's been presented by this poster here on the internet. Just my take.

5 Reply

Small Deals Mean Wasting Time & Making Small Money

Small Deals Mean Wasting Time & Making Small Money

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