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  • Pursuing Bigger Dreams: Real Estate Investing for Passive Investors With Paula Nichols [Ep177]
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October 31, 2023

Pursuing Bigger Dreams: Real Estate Investing for Passive Investors With Paula Nichols [Ep177]

In today's episode, we have an incredible guest joining us: Paula Nichols. Paula has a wealth of experience in the world of real estate investing, and she's here to share some valuable insights with us. Get ready for an episode filled with inspiration and practical advice! Paula emphasizes the importance of having bigger dreams and tells us why real estate is her passion. She believes that real estate can offer better returns than the stock market and encourages everyone to not be afraid to pursue their bigger dreams.

But here's the exciting part – even if you don't want to actively invest in real estate, Paula shares how you can still achieve your dreams through passive investing. She believes that passive investors should have access to real estate opportunities that can support them in pursuing their passions and callings. So sit back, and get ready to be inspired by Paula Nichols on The Darin Batchelder Real Estate Investing Show!

Episode Timestamps

  • 00:02:35 Who is your syndicator? What is their professional experience?
  • 00:05:47 Understand asset, know risk, diversify wisely.
  • 00:08:29 Learn industry lingo through books, podcasts, and webinars.
  • 00:10:21 Hour-long class teaches passive investing in real estate.
  • 00:13:19 Investing became a true calling, strengths combined.
  • 00:17:00 Real estate: bigger dreams, better returns.
  • 00:21:54 Relationships, syndicate, growth, success, friendships, time, deepen.
  • 00:23:51 People want to help each other. Conferences are helpful but expensive.
  • 00:29:22 Lack of trust, unanswered questions, legal control.
  • 00:31:46 Potential flood of distressed deals at discount.
  • 00:33:58 Question: What is the DSCR based on?
  • 00:38:46 Risk, entry/exit copy, interest rates, spread, successful Oklahoma investments.
  • 00:42:31 Overcoming limited beliefs, finding support and value.

Episode Table of Contents

  • Introducing Our Guest, Paula Nichols
  • Pursuing Bigger Dreams Through Real Estate
  • Understanding Investments and Risk Evaluation
  • Debt Service Coverage Ratio
  • Impact of Interest Rates on Real Estate Deals
  • Achieve Bigger Dreams Through Partnerships and Relationship Building
  • Journey to Bigger Dreams: From Single Family to Multifamily Properties

Introducing Our Guest, Paula Nichols

Introducing Our Guest, Paula Nichols
Photographer: Randy Tarampi | Source: Unsplash
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The Importance of Having Bigger Dreams

Paula mentioned that she and her husband Jonathan felt that they were pursuing entrepreneurship because it was something they had wanted for a long time. Paula said she wanted to be an entrepreneur since she was 14 years old, taking entrepreneurship classes and even creating her own business plan in high school. There has always been a seed of wanting to be an entrepreneur and be passionate about business in Paula's life.

Real estate came into Paula and Jonathan's lives at a time when they were both seeking to have something in common and found real estate as a hobby and something to do together. They started investing in single family homes as a side hustle and for fun. Then they realized real estate was a true calling for them and decided to grow their single family portfolio and transition into multifamily real estate.

Real Estate Is a Passion With Better Returns Than the Stock Market

Paula explained that both she and Jonathan felt real estate was a calling for them. Jonathan was previously an aerospace engineer while Paula was in consulting, and though they enjoyed their careers, they could not see progress happening as fast as they wanted in corporate America. Paula and Jonathan had bigger dreams and entrepreneurship was something they had wanted to pursue for a long time.

Paula said they realized real estate could provide better returns than the stock market for them. Real estate came into their lives at the right time when Paula and Jonathan were seeking a common interest. They found real estate to be a hobby at first, investing in single family homes, but then realized it was a true calling and provided an avenue to achieve their bigger dreams.

Encouragement to Pursue Bigger Dreams

Paula emphasized that she believes every person has a calling in life, whether that is being a doctor, teacher, stay-at-home mom, or anything else. Real estate provides a way to gain the resources and freedom to pursue those callings and bigger dreams. She highlighted that passive real estate investors may not be passionate about acquiring apartments themselves, but can use real estate returns to enable pursuing their true passion.

Paula encouraged listeners not to be afraid to go after bigger dreams. She noted that "bigger dreams" in real estate does not mean having to be the one executing deals yourself as a passive investor. Paula gave the example of professional passive investors with stakes in 40-50 deals who use real estate to earn higher returns so they can pursue bigger dreams in other areas.

Pursuing Bigger Dreams Through Real Estate

Pursuing Bigger Dreams Through Real Estate
Photographer: Raul Petri | Source: Unsplash

How Real Estate Can Help Achieve Bigger Dreams Even Without Direct Execution

Paula mentions that she and her husband Jonathan realized that real estate provided better returns than the stock market, which enabled them to pursue bigger dreams. She explains that real estate can provide the resources to follow your passion and calling in life, even if that calling is unrelated to directly executing in real estate. For some, their passion may be being the best parent possible or excelling in their corporate career. Real estate investing can generate the income needed to have the freedom and flexibility to devote time to those bigger dreams. You do not need to be actively involved in real estate to benefit from those returns.

Leveraging Real Estate as a Passive Investor

As Paula notes, many people start actively in real estate syndication but realize it is extremely demanding to handle other people's money and large commercial projects. It becomes clear that syndication needs to be treated as a full-time job. Therefore, passive real estate investment enables people to gain exposure to the asset class and higher returns without having to take on active management. Paula emphasizes that passive investors can have bigger dreams and aspirations outside of real estate, such as being an entrepreneur, doctor, teacher, or staying home parent. Generating wealth through real estate simply provides the resources to pursue their true calling and passion in life.

Access to Real Estate Opportunities for Passive Investors

There are various pathways for passive investors to access real estate opportunities. As Darin notes, attending real estate networking events, conferences, and meetups allows passive investors to connect with active syndicators and get on their investor databases. Passive investors can sign up for webinars from different syndicators to observe deals and learn terminology without making capital commitments. Building direct relationships with syndicators over coffee meetings enables passive investors to gain knowledge and vet potential partners. Taking advantage of education opportunities like Paula's multifamily investing course also accelerates expertise. With this familiarity of the asset class, passive investors can prudently evaluate deals and partner with trusted syndicators to fund projects as limited partners.

Understanding Investments and Risk Evaluation

Understanding Investments and Risk Evaluation
Photographer: Scott Graham | Source: Unsplash

Importance of Understanding the Assets Being Invested In

Paula emphasizes the importance of understanding the actual asset you are investing in as a passive investor. She advises getting to know details like the type of building, location, market, and age or "vintage" of the property. Understanding factors like the age helps an investor evaluate the level of risk for that specific investment. Paula recommends comparing different opportunities and accounting for risk factors when making investment decisions. Knowing details about the asset provides context on the feasibility of business plans to increase value.

The Importance of Understanding Your Investment: "I highly encourage all my passive investors and anyone listening to get to know a little bit of the asset, get to know a little bit of what you're actually investing."— Paula Nichols

Knowing Risk Metrics, Entry, and Exit Strategies

Related to understanding the asset, Paula highlights the value of being aware of risk metrics for a deal, like the debt service coverage ratio on day one and projected in the future. She explains that the DSCR indicates how much safety or risk there is in the investment. Paula also notes it is key to understand the entry and exit capitalization rates assumed in the underwriting and whether a positive spread is projected between the two. In today's environment with higher interest rates, many deals no longer have a positive spread between entry/exit cap rates and the interest rate.

Comparing Interest Rates to Determine Positive or Negative Spread

Building on knowing the risk metrics, Paula points out investors should compare the entry cap rate to the interest rate on a deal's debt. In the past, investors often saw a positive spread between these two numbers which boosted returns. However, with today's higher interest rates, that spread has flipped to negative in many cases. This means additional value-add will likely be required just to break even. Understanding this dynamic allows an investor to accurately evaluate risk.

Achieving Bigger Dreams and Success in the Oklahoma Market

Paula shares how her Oklahoma deals have performed extremely well by focusing on cash flow rather than appreciation. She explains they purposely invested in the market knowing it was more of a cash flow play without assuming high property value growth. By concentrating on increasing net operating income, they have been able to improve cash flow by 20-25% on their Oklahoma properties.

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Investing in Oklahoma: "All of our deals there are performing extremely well, extremely well. You know, cash flow of, like, over 10%. And because it is a more of a cash flow play over there, it's not, like, naturally growing equity, but we've been able to increase the NOI by, like, 20%, 25%."— Paula Nichols

Debt Service Coverage Ratio

Debt Service Coverage Ratio
Photographer: Alice Pasqual | Source: Unsplash

Explanation of DSCR in Evaluating Risk Level

Paula emphasizes the importance of the Debt Service Coverage Ratio (DSCR) as a key metric to evaluate the risk level of a real estate investment. The DSCR compares the property's net operating income to its debt obligations. A higher ratio indicates more cash flow available to cover the loan payments. Generally, lenders want to see a minimum DSCR of 1.2 to 1.25 to allow a cushion in case income decreases. A ratio at or below 1.0 means the property is just breaking even or operating at a loss. As Paula explains, the starting and projected DSCR over time provides insight into the safety of the investment and business plan.

Impact of DSCR on Asset Risk Assessment

According to Paula, assessing the DSCR is critical for understanding the risk profile of a property. For example, if the DSCR is only slightly above 1.0, it indicates the asset carries higher risk with limited cash flow to absorb any income reductions. In contrast, a robust starting DSCR with projections keeping it at 1.3 or above reflects a more conservative underwriting approach. Paula notes examining the DSCR helps interpret the feasibility of the operator's strategy to improve performance over time. Essentially, the DSCR offers a snapshot of how vulnerable the property is to fluctuating market conditions.

Questions to Ask About the DSCR

When evaluating investment opportunities, Paula recommends asking detailed questions about the current and projected DSCR. Important areas to cover include the day one DSCR based on actual in-place income, how the operator plans to improve it going forward, and the assumptions behind those projections. Requesting the DSCR sensitivity analysis will also shed light on how different rent growth and expense scenarios impact cash flow. Along with assessing the business strategy, understanding the DSCR metrics provides invaluable insight into the inherent risk factors.

Impact of Interest Rates on Real Estate Deals

Impact of Interest Rates on Real Estate Deals
Photographer: Austin Distel | Source: Unsplash

How Interest Rates Impact Cap Rates and Deal Timing

Paula discusses how rising interest rates have impacted cap rates and deal timing in the current real estate market. She explains that with interest rates increasing significantly, many properties that had floating rate debt are now facing much higher debt service payments each month, making it difficult to maintain positive cashflow. This has led to cap rates expanding as returns are squeezed with higher financing costs. She notes that many syndicators with bridge loans are hoping rates decrease before their loan comes due or rate cap expires, otherwise they may need to sell at a loss or refinance at a higher rate if possible. Paula indicates this has drastically changed the timing and strategy for exiting real estate deals in the current environment.

Overcoming Challenges and Finding Value: "And so for me, it was really defying that limited belief… I am here because I can create value, and my ideas are valuable."— Paula Nichols

Expectation of Distressed Deals in the Near Future

Looking ahead, Paula expects to see more distressed property deals coming to market in the next 3-6 months. She mentions speaking with lenders who are proactively reaching out to support refinancing, but many sponsors are still holding out hope that rates decline before facing maturity on their debt. In Paula's view, the increase in distressed deals will likely be from non-performing assets that were unable to refinance and now need to sell. She thinks these deals will require strong operational skills and capital expenditures from new buyers, but could present opportunities at discounted prices. Overall, Paula anticipates the market will see more motivated sellers with underperforming properties in the near term as higher rates make refinancing difficult.

Opportunity for Active Syndicators With Struggling Deals

For active real estate syndicators with struggling deals, Paula notes they have a few options in the current environment. If their asset is still performing well, they may be able to refinance their debt, though likely at a higher interest rate. However, if the property is underperforming, they may need to sell at a loss rather than inject more capital. While challenging, she indicates this influx of distressed deals could open the door to new opportunities for skilled syndicators who have the operational expertise and access to capital needed to turn around struggling assets acquired at discounts. Though risky, the distressed climate may provide prospects for experienced sponsors to pick up assets with upside potential that can be realized through hands-on management and strategic capital improvements.

Achieve Bigger Dreams Through Partnerships and Relationship Building

Achieve Bigger Dreams Through Partnerships and Relationship Building
Photographer: Charles Forerunner | Source: Unsplash

Assigning Tasks for Business Growth and Bigger Dreams

Paula Nichols highlights the importance of defining swim lanes of responsibility early on when working with a partner in real estate investing. She explains that in the beginning, her and her husband Jonathan were both doing everything with no direct responsibilities. However, once they started seeing their business as more formal, they assigned tasks and areas of focus. Paula focuses on asset management and investor relationships, while Jonathan handles acquisitions. Paula emphasizes that people are more efficient and effective when they are kept accountable for directing their own work. She states that assigning responsibilities allows the business to grow quicker.

Building Relationships With Friends, Family, and Mentors

Paula discusses how relationships are critical for success as an investor and for overall joy in life. She looks back and thinks about how she has met amazing people but often does not follow up with them after initial meetings. Paula recommends having a plan when attending conferences and meetups to get the most out of relationship building. She also suggests following up with new connections after events by entering them in a CRM system. Paula notes that even during busy times, continuing to deepen relationships with admired individuals is important. She also emphasizes the influence that friends, family members, and mentors have had on her growth.

Building Meaningful Relationships: "I think relationships are so important. I think that we will not be here today if it wasn't for friends and family and mentors that had influence, who we are today. And so I think that getting to know people at a deeper level…continuing to deepen relationships with people that you admire and that you just wanna be friends with, I think that that's just so critical for your success as a limited partner, but also just for your overall joy in life."— Paula Nichols

Importance of Deepening Relationships With Admired Individuals to Achieve Bigger Dreams

Paula Nichols states that relationships are organic and natural, but people should aim to have deeper relationships with individuals they admire and want to be friends with. She explains that even if you meet people online due to busy schedules, it is critical to continue strengthening bonds. Paula notes that she struggles with maintaining relationships fully online, as that is not her typical approach. However, she recognizes the importance of using discipline to follow up with new connections online after initially meeting them at conferences or events. Deepening relationships over time is key.

Journey to Bigger Dreams: From Single Family to Multifamily Properties

Journey to Bigger Dreams: From Single Family to Multifamily Properties
Photographer: Dillon Kydd | Source: Unsplash

Beginning as a Hobby and Transitioning Into Multifamily Properties

Paula and her husband Jonathan started investing in single family properties as more of a hobby and something to do together. It was a side hustle for them that they found fun. Over time as they grew their single family portfolio, they realized it was a true calling for them and decided to transition into multifamily properties. Real estate investing began as a passion project but eventually became the path they wanted to pursue more seriously.

Bringing Different Strengths and Skill Sets From Corporate America Backgrounds

Coming from backgrounds in corporate finance and engineering, Paula and Jonathan were able to leverage different strengths from their previous careers. Jonathan focuses more on acquisitions given his skills with numbers and speaking with brokers. Paula utilizes her management consulting experience on the asset management side and building investor relationships. Though they work together, they each bring unique perspectives and abilities. Defining these lanes early on helped streamline responsibilities.

Bigger Dreams, Passion, and Support in Partnership

Paula emphasizes that she and Jonathan both came into real estate with a shared passion, which has made the journey encouraging even during tough times. Having a partner that knows you well and can motivate you through challenges has been powerful. Their partnership works because of their common dream and belief in entrepreneurship. Even when they get stressed, they can uplift each other and draw strength from their joint enthusiasm for real estate investing.

Where To Find Paula Nichols

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Darin Batchelder


Wealth creation through real estate provided me with a new passion to get the word out and let others know that they have an alternative to investing in the stock market.

If I can inspire and educate just one person to take action that results in life changing wealth creation then the work to launch and grow this podcast is well worth the effort.

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