She’s Right, Bigger is Better…
My wife was right! This was no surprise because according to her “She’s always right”. Let me fill you in. On top of studying to get her doctorate and being active in the clinic during normal work hours, my wife probably puts in enough hours helping me with the real estate to where she could almost qualify as a real estate professional (this is a designation by the IRS for those who spend 750+ hours a year in a professional capacity in the real estate industry).
When I told her that we were going to transition into commercial multifamily to gain the economies of scale and efficiency of having many units under one roof she was excited, to say the least.
For too long I had been asking her for her help and pulling her away from her responsibilities (selfish husband move 101). Each residential property we bought had different problems and unique maintenance items. This made it hard for us to put the systems in place that we would need to continue to grow our portfolio.
Instead, we were spending too much of our time maintaining our current portfolio. And sometimes the juice didn’t seem worth the squeeze.
To combat the headaches, we were creating for ourselves, we began to focus on bigger deals, and thus why she thinks bigger is better. Here’s why:
She Knows That Multifamily Properties Afford the Owners Economies of Scale
Economies of scale refer to the fact that per-unit prices drop as the number of units rises. Think about the automotive industry where it is only viable to produce thousands of vehicles in order to spread out the fixed costs associated with making all of them. And they come off an assembly line with common parts on each vehicle because unique vehicles would not be viable at scale.
What this means for you as a potential investor is that you achieve more bang for your buck by going bigger. In an apartment building, all of the units have the same items, so that when one breaks it is a standard procedure to fix or replace. This lowers your maintenance costs significantly over the life of the investment.
Not to mention that units share common items like walls and roofs, lowing purchase prices on a per-unit basis. For example, 100 single-family homes would likely cost more than a 100-unit apartment complex in the same area.
She Knows There is Built-in Efficiency
This was a big selling point for my wife and why she was supportive of the transition. The built-in efficiencies are:
You can afford to hire an on-site manager for an apartment complex once the revenue supports the added expense. Some investors debate at what unit count this efficiency is gained but most agree it’s around 70 units. That number could change depending on the area, asset class, and ultimately the NOI it generates.
Reduced Operational Burden on Owner
Number 1 above plays a large role here. It’s more than just on-site management though. At that 70-unit mark, you can usually have a leasing office that houses your on-site management and full-time maintenance employees as well. At that point, it’s a business that runs itself and you become the asset manager and manage the manager.
This can still be a burden if you choose the wrong manager, so be careful here and choose the property management company that fits your property and strategy.
It Takes Less Time and Effort to Acquire a 50 Unit Complex Than It Does 50 SFRs
This one is pretty simple. It usually takes about 30 days to close a residential property from the time the contract is signed. This is the time that inspections take place, an appraisal is done, the lender underwrites the property, etc. Extrapolate that over 50 houses and you have an exorbitant amount of time spent administering due diligence and the closing process.
However, with a multifamily property, it takes 45-90 days to close the same number of units. This is one transaction that has one inspection, one appraisal, one lender underwriting, etc. This is a huge advantage for investors looking to reach their goals faster.
She Also Knows About the Larger ROI
This is what really excites me about multifamily investing. Imagine that you need only $5,000/month to reach your financial independence number and that by doing so you can supplement your current income and shift your life focus to your true passion. How many residential deals would that take?
As we mentioned above, that is most likely going to take you a lot of time to find that many good deals, close them, and manage them all together, yet separately.
Now, if you could reach that financial independence number with one deal, how much extra time, energy, and effort would that free up for you. Not only are the numbers larger, meaning you can reach your goals in chunks vs steps, but how they are valued also serves as a major advantage.
With single-family homes, your ability to capitalize on your equity (by refinancing or selling) is always subject to the market – what other homes in the immediate area are selling for. With commercial multifamily, however, your ability to capitalize on your equity is based on the income the property generates.
Overtime rents go up, which increases your NOI, which increases your value. This is one reason why insurance agencies and pensions invest in commercial multifamily. Commercial real estate is a steady and stable vehicle to build wealth.
I think if my wife realizes the benefit of commercial real estate more then anyone can grasp it. Not because she is incapable (precisely the opposite) but because she likes to remind me “I don’t care, I am not getting my doctorate in real estate”.
She likes the strategy that makes her life easier, continues to grow our wealth, and gives us more time to spend together having fun and eventually building our family.
She sees multifamily as the long-term play to be present in each other’s as we do all that. The benefits are abundant. Don’t let the big price tags scare you off because you’ll be glad you made it happen when you look back and have the passive income from your efficiently operated multifamily assets.
Blake Dailey is a multifamily real estate investor and host of the Multifamily Journey Podcast. He has reached his financial independence (Passive Income > Expenses) number through investing in real estate and aims to help others do the same.
He helps passive investors impact their lifestyle and wealth by investing in multifamily real estate through his company Growth Vue Properties. Growth Vue seeks to help investors achieve the ultimate asset – Time – by making their money work so they don’t have to.
Find out about investing in multifamily with Blake at thegrowthvue.com or learn more about Blake, read his articles, or connect with him through his website at multifamilyjourney.