JF1892: She Sold An Apartment Complex To Purchase A Hotel with Nichole Stohler
We don’t get to hear about hotel investors much on this show. Today that’s changing with Nichole talking to us about her investing story, which includes pivoting from multifamily and into hotel investing. This wasn’t intentional, but the returns were looking best with hotels, so they took that leap. We’ll hear about Nichole’s multifamily properties and how she sold a complex for a $1.2 Million profit in 18 months. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“Find someone who does what you want to do and find a way to add value to them” – Nichole Stohler
Nichole Stohler Best Ever Show:
- Founder and host of The Richer Geek Podcast, a podcast for empowering high-income professionals to find creative ways of building wealth and financial freedom.
- Owns 90 units and has a 64 room hotel under contract
- Based in Phoenix, AZ
- Say hi to her at https://www.therichergeek.com/bestever
- Best Ever Book: How To Be A Capitalist Without Any Capital
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Nichole Stohler. How are you doing, Nichole?
Nichole Stohler: I am doing great. Thanks, Joe.
Joe Fairless: I am glad to hear that, and looking forward to our conversation. A little bit about Nichole – she’s the founder and host of The Richer Geek Podcast, a podcast for empowering high-income professionals to find creative ways of building wealth and financial freedom. She owns 90 units and has a 64-room hotel under contract. Based in Phoenix, Arizona. With that being said, Nichole, do you want to give the Best Ever listeners a little bit more about your background and your current focus?
Nichole Stohler: Sure. First of all, I believe in being a W-2 entrepreneur. So I still work full-time, and then I’m partnered with my husband, who does really all of our property management and operations. And we primarily got started in multifamily properties. That’s my husband’s background. He was in property management in that space. We pivoted, because we got an unsolicited offer, so we ended up selling one of our apartment complexes, and under 1031 we were not finding the cap rates and really the returns we were looking for, so we pivoted to hotels a few years ago. And then we liked that model so much that we now have an additional hotel under contract.
Joe Fairless: Wow. How many units was the apartment community you sold?
Nichole Stohler: The apartment community was 50 units.
Joe Fairless: And what did you sell it for?
Nichole Stohler: Two point five. No. No, no, sorry, three.
Joe Fairless: What’s 500k… Details, right?
Nichole Stohler: Yeah… It was an unsolicited offer that came three times, so yes…
Joe Fairless: Fair enough. And what profit did you make on that?
Nichole Stohler: We were a little over 1.2.
Joe Fairless: Congratulations.
Nichole Stohler: This was when the market started to get a little crazy, and we’re here in Phoenix, we keep everything local, and it actually still has not slowed down in terms of apartment complexes in Phoenix.
Joe Fairless: When did you purchase that property?
Nichole Stohler: We purchased it in 2015.
Joe Fairless: And you sold it when?
Nichole Stohler: 2017.
Joe Fairless: Okay. So what was it, about two years? Or did the months line up where it was less than that?
Nichole Stohler: It was less than that.
Joe Fairless: About how long did you own it?
Nichole Stohler: Gosh… About 18 months…?
Joe Fairless: 18 months, okay. So 18 months and 1.2 million in profits. What would you say were some of the drivers for getting that increased valuation?
Nichole Stohler: Stabilizing the property, getting an on-site person that was able to manage a lot of day-to-day… That particular property, once it got stabilized, then never had a problem filling it, because there was a waitlist. There were people who were very interested. It’s a good location, too. I absolutely can’t emphasize that enough, just where it is in the Phoenix Metro area… And the property — it was a C property, so it was close to a bus line, and some of those things that pretty key features.
Then the other thing is I just think because of the craziness in our particular market, the unsolicited offer came from someone that was under their own 1031, and they were coming from out of state, and they were really just so anxious to find something… And it just was a very steady, not a lot of turnover in residents, not a lot of drama… Just a very good culture in the property itself.
Joe Fairless: Did I hear you earlier you said it was the third unsolicited offer?
Nichole Stohler: Yeah.
Joe Fairless: Was it the third one from the same person?
Nichole Stohler: Yes.
Joe Fairless: Well, how did that go? Tell us.
Nichole Stohler: Well, we weren’t actually wanting to sell. It was a good property, like I mentioned… With a waitlist, and a very consistent stream of residents. So basically, those folks that were under 1031, they just kept coming back, because I think they saw that it was a good resident culture type of property.
Joe Fairless: What was the first and second offer?
Nichole Stohler: Oh, gosh… My husband negotiated all of those pieces, so unfortunately I can’t — but I know the first one was “Yeah, that’s not worth it for us to sell.”
Joe Fairless: [laughs] Fair enough. You mentioned 2.5… Was that one of the offers, if you recall? If not, that’s fine; we’ll move on. I’m just curious.
Nichole Stohler: Yeah, I believe it was. He would have more of those details, yeah.
Joe Fairless: Fair enough, fair enough. You mentioned you stabilized the property… What was the property like when you purchased it?
Nichole Stohler: What had been happening is that the owner was more absentee, and not really involved. This is the other thing – we self-manage; my husband handles the self-management of the property… And we’re not managing other people’s property, just our own. And the owner at the time was very absentee, not heavily involved… People felt like their issues weren’t getting addressed… And people talk within the community, especially if you’re talking about this particular within Phoenix, and close to the bus line, and those types of things. So it’s just a lot of turnover and dissatisfaction with management.
Joe Fairless: Was it a local owner, or out of state?
Nichole Stohler: Yes.
Joe Fairless: It was a local owner?
Nichole Stohler: Yeah, but they had like 30 other properties, so…
Joe Fairless: Alright. So then you got this under contract to sell, and then I imagine initially you looked for other apartment communities, because that’s what you were used to… If that is the case, then what happened?
Nichole Stohler: That is absolutely the case, because that’s what we were used to, you’re right. That’s what we knew and we understood. Now, the story actually starts about two years prior, because we had actually been considering already investing in a hotel, just separate. Not under 1031, just as an additional investment. We had been introduced to someone who’s been in the hotel industry for 20+ years through our broker, and we were just kind of sharing information — we were very intrigued by the hotel numbers, and that’s why we were considering investing at that point in time. And we didn’t pull the trigger… Then when the 1031 came – now we’re under a deadline, and we’re selling this particular property, and we’re not finding any multifamily that meets our cap rate and our return on investment criteria, we reached out to the gentleman that we had met prior, and asked if he had any thoughts on hotels that were available.
The markets are different. As you network within your local area, you’ll meet people in different niches, and the folks in those niches really know that area and they know what’s happening. In his case, he had his pulse on all the different major hotels within the Phoenix Metro area, and he knew of this off market opportunity. So that’s how we were able to find a good deal as well, and it was really because of his expertise in helping us through that process.
Joe Fairless: Oh, I love that. How did you meet him initially?
Nichole Stohler: The broker that sold us a couple of the multifamily properties introduced us to him because the broker was helping him look for land, and he was looking to build a new hotel… And the broker, as they got to chatting, was very intrigued also by the numbers and the types of things this that this hotel guy was mentioning, and he said “At some point there might be other deals with folks that are in other areas.” So he introduced us really in the vein of kind of a referral, that maybe we could be working together.
Joe Fairless: And then the hotel investor/expert knew the market, identified or knew of an opportunity that was an off market deal, and then pointed you in that direction, and you ended up closing on that deal. Correct?
Nichole Stohler: Yes.
Joe Fairless: And in that scenario, do you give that investor any cash for hooking you up with that deal, or is it just you take them out to dinner, or none of the above and it’s just a handshake, “Thanks a lot. I’ll remember this”? How do you approach that?
Nichole Stohler: I think you could do all of those things. In our case there’s a little bit of an additional involvement that we needed from him, and he is still actually involved with us today. The first thing is in getting a commercial loan for a hotel without having any experience – now, yes, you could bring in a management company that has hotel management experience, and then maybe at that point we’d be able to get the loan… But he was instrumental because we basically said “He’s gonna be part of our management team, and he’s going to help us pick out a general manager, and help us manage expenses.” So he has a portion of equity in the company that we formed, that purchased that particular hotel.
Joe Fairless: Oh, perfect. Okay. And then in that type of scenario, what is the percent range that you would give to someone for that role?
Nichole Stohler: I think it really depends on the situation. In our case, we were very new to getting engaged, so he has a much higher percentage on that particular hotel… But he’s also engaged in this new hotel that we have under contract, and at that point the percentage is much lower, because we have the experience… But we still want his support and mentorship and oversight. So it’s kind of graduated from–
Joe Fairless: So it just varies…
Nichole Stohler: Yeah.
Joe Fairless: Fair enough. And what would be the range? You said “high” – what is high in your mind and what is low in your mind?
Nichole Stohler: I think high could be between 30% and 50%, depending on what that person is doing and what they’re bringing to the table. Basically, we become more of a money partner, and he becomes more of a doer. And then, in the next hotel, if we’re more of a doer, but we still need that oversight, you could be talking more like 10%-20%.
Joe Fairless: Okay, fair enough. Thanks for that. You mentioned earlier you were intrigued by hotel numbers when you initially were introduced to hotel investing… Educate me on what that means, please.
Nichole Stohler: Sure. We were used to multifamily C type of properties, for the price range and for the cap rate at the time, which has changed significantly lower. Hotels, for the same cap rate or better – and in today’s market better – you are not in a classification that I would consider C. In our case, were’ in select, limited service types of hotels, and the travelers and the clientele are business folks that are looking for convenience, because we’re close to an employment center. So off the bat, the first thing that’s interesting is you have a higher profitability for the number of rooms. You have a different clientele than you do in C multifamily properties. And then because you have a different clientele, the services and the incremental ways that you monetize a hotel are different, and I think more varied, more opportunities than there are in multifamily. So those are some of the things that we learned, and we were educated on, and the returns looked significantly higher.
Joe Fairless: What are some of those ways to monetize hotels?
Nichole Stohler: That’s a great question. One thing to think about is in a hotel you’re going to offer free Wi-Fi, and someone’s gonna login – almost everybody uses the free Wi-Fi… They’re gonna login, and there’s a splash page.
Joe Fairless: Upgrade.
Nichole Stohler: Yeah, you can upgrade, and you can also — on that splash page, you can sell advertising space with local restaurants, local venues, folks that want to get their information out to a captive audience who’s traveling in town. So there’s monetization of the digital side of things. There’s also packages and events you can offer. So you can bundle those with a stay, and maybe golf… Some local event that’s happening, as well.
You can also monetize your breakfast space… And I’m gonna say that because we’re in limited service, and limited service almost always has a free type of breakfast, and there’s a space for that. And then depending on how the hotel is set up, you can then rent that space out for events and for smaller business type of meetings… So there’s a lot of interesting different ways to monetize, versus in multifamily what we might be looking at is we’re going to upgrade the units, we’re gonna add a stackable washer-dryer, we might add covered parking that people could pay more for, a storage unit… So just different ways to monetize that are more business-to-business focused.
Joe Fairless: The splash page for the Wi-Fi, where you sell to, say, local restaurants – that’s really interesting. I feel like that could be done with an apartment community, too; perhaps not a splash page via the Wi-Fi, but maybe it’s working with local restaurants and getting them some sort of access to the residents through monthly communication that already goes out to them from the property management company.
Nichole Stohler: That is a good idea. We never did that because the resident type that we had – I don’t know that that would have been as efficable for them…
Joe Fairless: Right, right…
Nichole Stohler: But I definitely think in your A properties, 100%. Or your B properties, yeah.
Joe Fairless: Okay. It makes sense. And when I hear hotels – this is the ignorant part of me, because I haven’t studied up on hotels, and I’m sure you’ve come across this, and you know where I’m headed probably already. But when I hear of hotel investing, I think “Ugh, it’s going by the wayside. We’ve got Airbnb, we’ve got these different vacation rental places online… I just don’t see how hotel investing is the future. I think that is the past.”
Now, I don’t necessarily believe that, but that’s just my initial perception. So what are your thoughts about that type of thought process?
Nichole Stohler: I can totally see that, because if you’re the type of person that stays in a short-term rental – an Airbnb – and you had a great experience, and you’re thinking “Well, this is fabulous. It’s more space, private home…” And the thing in all of that that I’m describing is it’s an experience; it’s something typically — when you’re going on vacation, you want something different. I’m still working full-time in corporate America, I’m in technology sales, and I travel for work. When I travel for work, first of all, I’m booking through our booking system, which today is really all the primary hotel chains that are required that I would book through… But the other piece is I just want convenience. I just want to be as close to the employment center as possible. I am not going to swim in the pool… I might use a fitness center. I’m not going to be exploring the area…
So the difference in why we like limited service is we are focused on that business traveler. We are focused on people that want to come in, they know exactly what they can expect from the hotel. They have a brand preference, they aren’t worrying whether “Did the pictures on the website really depict the way the home is?”, because you definitely hear those kinds of stories… They wanna know what they’re gonna get and get convenience, and for a good quality price, which is also in that limited service type of hotel. It’s just a different market, and I think there’s room for everybody, because there’s different travel preferences based on what you’re trying to experience.
Joe Fairless: Okay, it makes sense. The limited services part – you’ve mentioned that multiple times. What’s the opposite of limited services? Is it full-service hotel? And if so, what are some examples that we might recognize, or brands we might recognize that are on that end of the spectrum, and then your end of the spectrum?
Nichole Stohler: Sure. Limited service basically means that you’re going to have key amenities, like — generally, in Arizona you’ll have a pool. I’m not sure necessarily in all areas of the country, but you’ll definitely have a fitness center, you’ll have a hot breakfast, you’ll have free Wi-Fi… But you won’t have an on-site restaurant. And that is a key market segment difference. And then you also have different segments, like extended stay, which have in-room suite areas, or little kitchenette areas… So in limited service you’re not gonna have that either. So you’re gonna have a room with those amenities.
The types of brands in that limited service would be Choice Hotels, Quality Inn, Comfort Inn – Some Comfort Inns; some might actually have restaurants as well. It would be Holiday Inn Express, La Quinta… Those are some of the key limited service types of hotels. Now, when you get into a full-blown Marriott, or a full Hilton, those are gonna have generally restaurants, and other pieces. And then you go up a spectrum. If you’re talking about AJW Marriott, this is a resort hotel, with multiple pools, and a spa… So different levels based on the band within the hotel industry.
Joe Fairless: Which one is yours?
Nichole Stohler: Which brand?
Joe Fairless: Yeah.
Nichole Stohler: We have a Quality Inn, and then the other hotel that’s under contract is a Country Inn and Suites.
Joe Fairless: Now, when you went to buy the Quality Inn, is there an opportunity to rebrand it to another type of hotel?
Nichole Stohler: Not necessarily. That’s a great question. Because the contracts for the branding are longer-term contracts, but you may come into a hotel that’s in either a cycle, where it’s repositioning, or it needs to be repositioned. As an example, the brand itself may say “We no longer want hotels that don’t have an elevator”, as an example. So as an owner, your choice is “Okay, I put in an elevator, or I rebrand to something else, where I can just continue to have stairs only.” That’s one type of example.
Joe Fairless: Okay.
Nichole Stohler: So that does happen as well. You’ll have your long-term contracts, and then you’ll also have contracts that don’t come up for renewal, and you also have the opportunity to change.
Joe Fairless: And if you change – say you wanna go from Quality Inn to Best Western, or something; do you have to pay the Best Western brand licensing fees in order to do that, or do they pay you because you’re now bringing in revenue for them? How does that work?
Nichole Stohler: That is what’s unique about hotels, too. We definitely wanna hit upon that – the franchise piece of it. And yes, there are franchise fees, but those are negotiable, based on either the franchisor’s desire to be in that specific area and the incentives that they’re offering, or your negotiating power based on that you have a great location, those types of things. So you do have those fees.
And to speak about those a little bit… It’s like “What do you get for those?” First of all, when you’re talking about hotels in this specific market, where you’re a business convenience traveler, they’re looking for a specific brand type that they can know and recognize, and there’s a lot of value in that from a pure marketing standpoint. But there’s marketing you can do on your own as the hotel as well, but you’ll definitely be receiving loyalty program people, online booking, those types of things. National advertising, mobile apps – all of that that’s developed as part of being a franchise owner.
The other piece is a really close network of other franchisees that are sharing best practices continually, and very specific to the brand that you own, but the challenges and how they’re solving them, and being able to leverage that knowledge and expertise continually, in your own hotel.
Joe Fairless: Got it. What’s been the biggest challenge of the hotel business on the deal that you currently own?
Nichole Stohler: The biggest challenge – and I don’t know that you would necessarily have this in every area of the country. In Arizona we have a very seasonal market, where the summertime is our slowest time. This is not when people are coming to Arizona, when it’s 115 out… And our most busiest time starts really in October and goes on through to April. So the challenge with that summertime is you still have high costs; you still have your mortgage, of course, and your debt service, but you have high cooling costs that you have to maintain, because you do have guests that are staying.
So the hardest thing comparing to multifamily is it’s not a consistent revenue, even if you just were to say “On average, our occupancy – here’s what we could expect.” We have average occupancy as well, it’s just that it’s maybe 100% during the top season and lower during the low season, so you have to be very studious and diligent about putting away reserves. You have to be very cognizant of those months. You can’t assume every month is the same.
Joe Fairless: And what type of reserves do you put away? How do you think about that?
Nichole Stohler: We always think about it in terms of three months of reserves, to be able to cover those fixed expenses, and then a little bit of buffer on top of that. And then we also know what our breakeven is during those months, and we’re not necessarily running crazy specials, because we still need to make sure we’re at breakeven.
Joe Fairless: You’ve got a 64-room hotel under contract – what can you tell us about that deal?
Nichole Stohler: The negotiated purchase price is 5.2 on that. It is right in Phoenix Metro Area, a really fantastic location, close to a number of employment centers, as well as very accessible to major highways… Tons of opportunity, because the current owner really has treated the business like a lifestyle business. So a lot of opportunity for negotiating corporate contracts, digital advertising… Some of those things that I’ve mentioned as well.
We’re mostly excited about the location and the upside that we see almost immediately with some improvements that we would be implementing.
Joe Fairless: And what are some improvements?
Nichole Stohler: Well, one of the first things is that that particular property – and to your point about rebranding – it’s actually going through a rebranding, and the entire lobby and downstairs area and exterior has been remodeled, and it looks very fresh and clean, and very inviting. The rooms themselves are dated, and absolutely need to be upgraded, so that will be our first capital improvement project that we’ll be doing as soon as we take over the hotel and updating all of those rooms to a more modern look and feel.
Joe Fairless: About how much does it cost on a per-room basis to do that updating?
Nichole Stohler: The total projected cost on that is $300,000, and we’ve got 64 rooms.
Joe Fairless: So that would be about $4,600. Well, let’s say $4,700. Okay, cool. Based on your experience, what is your best real estate investing advice ever?
Nichole Stohler: Best real estate investing advice ever is to find a mentor. And where do you do that? Find someone who does what you want do, and deal with them; offer to help them out, find a way to add value, and learn from them in that particular niche.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Nichole Stohler: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best Ever book you’ve recently read?
Nichole Stohler: I just read “How to be a capitalist without any capital.”
Joe Fairless: What’s a deal you’ve lost the most amount of money on?
Nichole Stohler: Way back in the beginning, in 1999, we bought actually for properties, all kind of duplex/fourplex, that type of property… And we used credit card cash advances for our down payments. They were seller financing and they were all in disrepair. So we had to put all that on credit cards. We didn’t know how to manage residents, we fell deeper into debt, gave back the properties, and ended up moving in with my parents to pay off our debt. That was 1999. [laughs]
Joe Fairless: A long-lasting lesson, I imagine. For someone who is in a situation where they’re considering that type of structure, what are some specific things you tell them to do or not do?
Nichole Stohler: In the seller financing?
Joe Fairless: Seller financing, credit cards… Pick whichever direction you wanna go.
Nichole Stohler: The first thing is the reason we got into trouble is we didn’t understand how to analyze property, and we didn’t know how to manage residents. You can find deals, but if you don’t understand “Is it a good deal?” Just because you don’t have to get a mortgage, or you don’t have to put any money down, it doesn’t mean it’s a good deal… And then the other piece of it is how do you manage ongoing– so I would really understand the numbers. If you’re doing things like you’re taking out a home equity loan, and you’re leveraging that to put down payments and buy rental properties, just really understanding the numbers, especially on a very conservative level. What was the worst rental amount for that particular area or that particular type of home during the past ten years, and if that lowest, kind of under a stress test – what are the expenses that you could typically see? You just plan for the worst, and then you’ll be fine. But you have to plan for the worst, because – Murphy’s Law, that’s what will happen.
Joe Fairless: Best ever way you like to give back to the community?
Nichole Stohler: My husband and I are active Rotarians, and we particularly love Rotary because my husband likes to give back to veterans, and I love pets, and particularly dogs and rescue animals… And the thing about Rotary is it’s really a local organization that gives grants to different types of organizations. So you can be involved, raise funds, and then give back to different areas that you care about.
Joe Fairless: Best ever deal you’ve done?
Nichole Stohler: Best ever deal… I would say that hotel. Just the incremental value that we’ve seen in the hotel, and the fact that it’s in a market where there’s a lot of growth that’s happening just now. When we bought it, that wasn’t happening. We had awareness that it could be, and those things are absolutely coming to fruition – new factories, new employment. Meanwhile, it’s been positive cashflow and consistent year-over-year growth with operational improvements.
Joe Fairless: When do you plan on selling it?
Nichole Stohler: We wanted to wait and see after some of this development continues, because we think we could continue to get a very attractive return at that point in time. So I would say probably in about a two-year window.
Joe Fairless: You made 1.2 on the apartment community… How much do you think you’ll make on that?
Nichole Stohler: The 50-unit?
Joe Fairless: Yeah.
Nichole Stohler: We already sold that.
Joe Fairless: Okay, but I’m talking about the hotel. You made 1.2 on the apartment community, right? And then you said your best ever deal is the hotel.
Nichole Stohler: Yes.
Joe Fairless: Okay. So you sold the hotel as well, the one that you were just talking about?
Nichole Stohler: No, not yet.
Joe Fairless: That’s what I was wondering – how much do you think you’ll make on that when you sell?
Nichole Stohler: Gosh. Upwards of two million.
Joe Fairless: And the best way the Best Ever listeners can get in touch with you?
Nichole Stohler: The best way is on my website, which is TheRicherGeek.com.
Joe Fairless: Where did you come up with that name?
Nichole Stohler: Well, because I’m in technology, and my podcast is (and that’s my podcast site) for people in technology… So it’s kind of a play on words, where we call ourselves geeks.
Joe Fairless: [laughs] Fair enough. Well, Nichole, thank you for being on the show and sharing your experiences as an apartment owner, as a hotel owner, as a real estate entrepreneur, as someone who has had some challenging deals, as well as some incredibly successful deals… And how you’ve pivoted from multifamily to hotels, and how you transitioned with some help of people who have been in the industry for a long time, and then attracted them to partner up with you.
I really enjoyed our conversation, and I learned a lot. I hope you have a best ever day, and we’ll talk to you again soon.
Nichole Stohler: Thanks so much, Joe.