Starting big or small?
Hello BP Community!
I have dived deep into the info provided in BP and other areas including books and have come to a conclusion that in order to reach the goals I have set I will need to venture into apartment rentals. What I am struggling with is whether to start at 5+ or go big like 30+. I do have a number in mind. What has helped you decide?
I appreciate your collective wisdom and experiences.
Thanks
Maua
For me it was simply what I could or couldn't afford. I started with a single family town-home. I wouldn't have been able to afford a multi-unit property. I don't feel with comfortable with all the alternative financing people discuss and went with a mortgage on the home. It was a great call and I was able to save the income from that property (while working full time also so that yielded additional savings and cushioning) to buy the next one and over a few years worked up to four homes, three of which are rentals (one a two unit).
The other thing to consider is if you are just learning and dipping your feet in the water, you will make mistakes. Even after doing it for years you will still make mistakes. If its a smaller investment, your mistake may be smaller and manageable. I'd rather make a $10,000 mistake than a $80,000. I could also bounce back from the former but probably not as easily from the latter.
At the the end of the day, you will receive a lot of advice and you have to decide what works for your and your budget. This was just the place I came from starting out.
I personally am planning on starting small and working my way up. My thought is make mistakes on a smaller scale, and if I do find investors to work with, I figure they'd rather lend me a small amount to start with. So basically I'm using it to build experience.
Start small and build yourself a great track record! That way you can show investors and friends how well you perform. Once you do that it will snowball from there.
Thank you for your insight. Looks like the trend is to start small and build your way up. I will definitely consider that suggestions. I wonder though for anyone with a larger number of units, if the effort to purchase 4 and under rental units is any different from that of 5+ units. Also if the advice will remain the same in the case where there is enough resources to make 30% down payment towards the 5+ rental units.
From my experience, the effort to purchase a 10 unit is the same as it is when purchasing a 4 unit. The biggest reason I would recommend to start small is because you will make mistakes. It's part of the learning process. Mistakes on larger properties can be a lot more costly than mistakes on a smaller property.
I think that for most new investors the idea of starting big vs starting small is a question of "Will I want to own 100% of the business, or own 10% of the business and manage the rest for an investor."
A good way to look at this is if you have $20K, you have two ways to get started.
Option A: Put the $20K down on a $100,000 small property
Option B: Raise some amount (perhaps $180K More) and buy a much larger property with a team of investors (perhaps a $1M property).
If both properties have proportional cash flow, you make the same amount, right? The difference is that in Scenario A, you have 100% control over the situation and are only responsible to yourself. In scenario B, you have only 10% of the ownership.
Which is better?
In most cases, I personally would argue for option A - why complicate things by bringing in others? Exceptions to this would include scenarios where the investors are willing to work you through mistakes (i.e. they aren't Uncle Joe, they are seasoned investors that will walk you through difficult projects) and scenarios where the truly great deal is simply out of your reach alone.
But, for most people, I bet that getting started small, on your own, with 100% ownership is probably ideal.
I personally wouldn't go big if my only option were to partner up and have a very small percentage of ownership...
That being said, my plan is to start as big as I can with what I can in apartment buildings.
My view on it is this: would you rather go broke and fail (potentially but not likely with the right team and education) on a duplex? Or on a 100-unit building?
If I'm going to make a mistake, I want it to be on a building with over X amount of units, but that's just me. You can always go the comfortable and "secure" route with a 2-4plex.. Which, depending on your market, may actually be less secure considering you have very little action to take in regards to the value of the property.
I'm new myself, but I find that starting small would be the lesser risk to take especially if you're a new investor. Just in case you take a loss, it won't be as monumental as starting off big.
Thank you guys for your input. It is much appreciated. I am learning a lot and trying to figure out what risks I am comfortable taking because there are pros and cons to either way.
I would recommed starting small. You can always go bigger. Smaller investment=lower risk, larger investment=higher risk. I'm just speaking from financial stand point. If you buy a place for a million you are going to put down 100-200k. More units is also more to take care off. The most successful people long term don't leverage themselves too much. I'm talking about people that made it through 2008 without losing it all.
That's a really good question, I would say it definitely depends on your experience and cash you have for your down payment. Those are the two things Freddie Mac looks for when financing big deals. Or look for a really good owner finance deal, but you still would need cash for your down payment.
I just listened to podcast 167 with @Kevin Wood, the webinar last week by @Brandon Turner and a few others as well regarding commercial investments and bottom line is starting. So, that is what I will do and will share progress as I go including whether I jumped in big or waded in the water slowly. Thanks again for all the thoughts, greatly appreciated!