All Forum Posts by: Michael Ealy

 You are right as always Jay. 

And Darren, your response was buried in the flurry of responses so I was not able to reply. Thanks. And I totally agree with you. 

That's the issue with hotels is their sensitivity to a recessionary environment. I've looked at the historical results and what's interesting is that during recessions, hotel's RevPAR drops during a recession which usually last 12-18 months - and then they go back up immediately after. SO my philosophy is you protect your hotel investments from recessions by buying them right. I only buy buildings (apartments and hotels) that I can do value-adds and only buildings in locations that are growing with diversified employment base. I buy significantly below rebuild cost so I can lower my ADR if needed to be competitive.

I really don't buy for cashflow or converting capital to a certain yield. I want my and my investors' capital to GROW through value-adds and through appreciation (since I buy in growing areas)...and while waiting to sell, me and my investors want to get paid a healthy cashflow. This investing philosophy has protected me and my investors with no investor losing capital with me even during the Great Recession.

 I actually agree with you Kata. Going BIG too fast, and in the wrong way...can become disastrous.

Here's what most people don't know though: BIG deals are not necessarily big risk plays.

With single family homes, if you get one bad tenant who skips a month or two in rent and you have negative cashflow for the entire year.

With multi's and hotels, you get one unit vacant, you're OK. So your vacancy risk is actually LOWER with bigger deals.

Also, big multis and hotels can afford a full time property manager and full time maintenance personnel. As a result your cost of property management is lower than 10%, sometimes as low as 5%. As you know, in rental properties, unexpected repairs sometimes happen and with houses, the risk of being down to $0 cashflow or even negative is very high.

Makes sense?

 Thanks Bill - as always your answers and comments are good and shows you are a very smart man.

And I agree with you that there's no one size fits all advice. Exactly why the "Start small - start with a house when you invest in real estate" is also not a good advice for everyone.

Just sharing with you and everyone my experience that my smaller deals take up more time/hassles than my big deals. And I can see here that I am not the only one with that experience.

Appreciate the counter-points.

 I like it man. You are on the right track.

Then scale it as fast as you can, when you can. But everything does not have to be done by you.

I agree. To each his own...and what one considers a big deal might be small for another anyway.

But do you want to do it 1 house at a time or you get a 20 unit "crappy" building in a good location that is improving and give 20 families a better place to live?

If you can do the latter, help more people, make more money and it does not take 20 times as much of your personal time (because the with the 20 units you can have contractors who can do the work faster than you can), why NOT?

 Steven,

Anything you lack, someone else has it.

Can you leverage on one with the track record? 

Come to think of it this is exactly what I did on my first hotel deal. I didn't have a track record so the banks refused to give me financing. So, I found a partner with the track record and the rest is history.

You can do it - it just takes a little bit of creativity and lots of hustle.

 Matthew,

I actually don't disagree with you either.

You can't be locked in with just doing a particular deal size and you don't do anything else because that means, you will wait for a long time and not do a deal.

As always, in life, it's a balance of different principles.

There is such a thing called Opportunity Cost. What's the OC of waiting for a big enough deal vs. the OC of doing a small deal? If you think it makese sense to wait, then wait. But, if 100+ unit apartment complexes are not in your market and they're overpriced, then do something else.

With regard to just letting the numbers do the decision-making...here's a question:

- you can make 25% IRR on a small deal vs. a big deal, but is that 25% IRR on that small deal worth your time and effort and what are you missing out on by having that small deal take up your time?

Let's say, you make $200,000 a year in your job (outside of real estate). So, you make $100/hour. To make the math simple, let's use ROI instead of IRR but the principle is the same. You have access to $100,000 in capital for example. Which one will you do:

Deal A - small one - you need $10K and need 100 hours of your time and you make a 25% ROI; or

Deal B - big one - you need $100K and need 100 hours of your time and you make 25% ROI

You can only do one deal at a time and doing Deal A means you lose out on Deal B and vice versa.

By the time you do Deal A, you make $2500 profit on 100 hours worth of work. That's $25/hour. You're making $100/hr so Deal A is a waste of time. In contrast, Deal B makes sense because you're making 2.5 times your hourly wage. BUT, if it takes you 20 times as long as to find Deal B and you have no other deals, sure: do Deal A during your non-working hours.

Makes sense?

I actually started over - I lost everything in 2002-2003. So starting over with $0 and a low credit score (so low, it could have been a golf score), I was able to go from that to acquiring over 3,000 apartment units and houses (and I keep 1,000 apartment units today).

But, your question is: for someone with NO experience, NO knowledge and NO money, how can one start and go into a BIG deal? 

Great question Brett.

The way to do it is:

1. Get the knowledge - read books, attend webinars, seminars and even pay for the know-how if you can afford it. Learn how to underwrite deals and know what a good deal looks like.

2. Get the know-WHO: network like crazy and talk to people. You will meet people with capital, people with exeperience, people who can find you deals, people who can manage, etc. You need to work on your communication, persuasion and leadership skills.

3.  Play "match-maker", put the deal together and have a piece of the pie.

You can start with a deal a little bigger than you're comfortable with (I am not suggesting you start with Trump's hotel). Say you feel comfortable acquiring a house...maybe go with a 4-plex instead. Things that you don't have, someone else has it.

 I like Hilton and Marriott but it's not just the flag...your operator, the location and how well you bought the property are key considerations to ensure you don't suffer even during down markets.

 Thanks Trent.

There you go: you can go from small deals to big deals in a hurry.

Good job for implementing what you've learned even just from forums.

I wish more people are like you: humble and ready to listen and implement what you learn. You will reach greater heights of success in real estate investing my friend.