5 Reasons Why Bigger is Better with Apartment Building Investing
When I bought my 12-unit apartment building in Washington DC I was overwhelmed by its size and complexity. Sure, I had flipped about 30 houses and analyzed about a hundred apartment deals in Texas several years before, so I wasn’t a complete newbie, but having a building like this actually under contract was quite a different thing entirely.
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Interestingly, three weeks into due diligence, my comfort level not only expanded but I began to wish that the building was bigger. As I was going down my due diligence check list, I realized that a 12 unit was about as much work as a building twice its size.
Here are 5 reasons why bigger is, indeed, better when it comes to apartment building investing
Reason # 1: A Much Better Buying Experience
With my 12-unit, I was dealing with an emotional seller who managed the building herself and kept utterly incomplete records. She had hired a residential real estate agent who was completely overwhelmed with the sales process of a commercial real estate building. As a result, the entire experience was stressful, the deal nearly fell apart, and it took 4 months to close.
Contrast this with the experience involving the purchase of a 44-unit building, for example. The larger the building, the more professional everyone tends to be. The commercial real estate brokers guide everyone through the entire process. The property is managed by a professional property management company that produces financial reports that are readily available, extensive, and detailed. The seller tends to be less emotional and actually make business decisions you can relate to.
Reason # 2: Economies of Scale.
The larger the building, the less stuff costs on a per unit basis. For example, the property management fee for my 12-unit is 8% but for a 44 unit, that same fee may very well be 5%. Other expenses, like trash or insurance start to decrease as a percentage of income the larger the building. In other words, the larger the building, the lower you can get your expenses.
Reason # 3: Less closing costs
And speaking of expenses, for my dinky 12 unit, my closing costs were 8.5% of the purchase price! That's because a lot of the closing costs are almost like fixed costs. For example, the loan doc prep costs are normally about the same (or differ only slightly) based on the purchase price. Your appraisal will cost at least $2,500, even for a small building, but will only go up slightly for a much larger building. Your SEC attorney will normally charge you the same for preparing legal documents for a $500,000 building or a $2M building. For a much larger building (say, around $2M), the estimated closing costs are about 4.5% all in. It's like shopping on black Friday: the more you spend, the more you save!
Reason # 4: Better financing
Loans under $1M are harder to get, have higher interest rates, and almost always require a personal guarantee. On the other hand, loans above $2M are much easier to get, have a lower interest rate, and are often non-recourse for stabilized assets, which means you don’t need to personally guarantee them. That alone is enough incentive for me to go after bigger deals!
Reason # 5: Bigger Pockets, I mean Profits -;)
And finally, the bigger the building, the bigger the numbers become. Do I want $1,000 of cash flow per month or $10,000? Wouldn’t I be able to achieve my financial goals faster if I did bigger deals?
If my goal is to get to 100 units (or whatever), wouldn’t it be better to do one or two bigger deals than ten smaller ones?
The answer is of course, “YES!” but, there is one HUGE challenge you need to overcome first:
Getting Over Your Biggest Obstacle: Yourself
Will I have to work a little harder to do a bigger deal? Well, maybe a little. I may have to work hard for longer until I get that bigger deal. But I can tell you you’re going to work ten times harder if you go after 10 smaller deals.
The other obstacle I constantly have to get over is my own mind. Certainly I’m comfortable now with a 12-unit and also with the idea of a 24-unit. But what about a 75 unit? I’m constantly striving to expand my own comfort zone by analyzing and looking at larger deals and visualizing myself closing such a deal.
Raising More Money
Then there’s the issue of money, or the lack of it. For bigger deals you will need more money, possibly more money than you have yourself.
The answer, of course, is to raise money from private individuals, and I’ve been writing about this extensively on the Bigger Pockets and also on my own blog. Once you arm yourself with a little bit of knowledge and confidence, there is no reason why EVERYONE shouldn’t be able to raise money to do bigger deals.
Bigger is most certainly better with regards to investing in apartment buildings. Let this sink in and then transform your buy and hold investing strategy. Skip the single family rentals and duplexes and imagine instead a much bigger building. Then go for it.
What do you think about the idea that “bigger is better” and what have your successes and struggles been in this regard?