Growth Strategy - Go big fast, or small, diverse and slow?

Question

Hi Guys,

I have about 5 units across two small multis right now and want to scale. I hope my question won't be too general. It concerns growth strategy. Would you guys generally recommend growing slowly and diversifying by location or buying the biggest buildings one can as fast as one can? Let me give a scenario to be a bit more explicit.  Is it a better idea to buy a single 20 unit building, or two 10 unit buildings, or four 5 unit buildings? Assuming one has the money to support either scenario, which is the better strategy and why?

Thanks!

Brian Adams · Answer

@Donald Scott, go big fast. The more doors you own you can spread the operating costs to mitigate your risk.

I went from buying a duplex to trying to take down a 130+ unit deal on my own. I didn't have all the pieces in place at the time such as having a solid investor pool and loan sponsor. But now I have bought and sold 1000+ units. Feel free to check out my BP podcast #135 to learn more.

David Corey · Answer

I agree with @Adam Kappel.  If all things equal, I'd go for the 20 unit as long as you're setup to manage it.  That being said, I'm guessing it won't be as cut and dry as just being able to choose whether you pursue one option or the other.  My business partner @David Sohn and I have tossed this around recently.  A deal is a deal.  I think it comes down to what you want your portfolio to look like.  What's the best use of your time?  What property type has the best exit strategy?  What does the potential acquisition do for your cash position and ability to buy the next one?  If you're just starting out, and there's a great 5 unit available, would you pass that up waiting for a 20 unit building to come along?  As long as you're coming across a deal that would be a good add for your portfolio, I'd say go for it.  If given the choice, I'd prefer the 20 unit building as well, but those may be harder to come by and tougher to find the ones where you'll be able to acquire at the price you need.   Good luck!

Cary F. · Answer

It's a proven concept in REI that it's better to have as many units under one roof as possible. This idea is laid forth in many of the popular books for real estate investors.

I would grow at a rate that promotes business longevity. You don't want to over-lever and expose yourself to thin margins and pressure from increased debt service expense. Grow in a way that makes sense, over time since time is one of the most important variables in successful investing.

DO go for the 20 unit apartment. You could finance the deal with a bit of cash, a private note and a commercial note.

DO more due diligence than is required as this one property will dictate how well you will do going forward.

Perhaps the best thing about apartment investing is the rate at which you acquire equity. Remember, commercial notes have much shorter terms. This will increase your purchasing power exponentially over time, assuming that you are finding good deals.

Adam Kappel · Answer

My personal opinion on this would be that if you have the financing and the risk weighs out to be the same on a 20 unit v.s. a 5 unit, I'd go for the larger. The only risk I see is whether you'd be putting all of your eggs in one basket by going big all at once. I would recommend some diversification in terms of strategy and having a fall back plan should something go south on that one property.

David Thompson · Answer

Donald,

The game is scale and forced appreciation.  You get that thru concentration.  Keep focusing on building up from 20, 40, 80, 160.  Want to go even faster, syndicate once you gain some experience in value adding, improving NOI, etc.  Want to leverage credibility faster, once you get some size, get a professional property mgt company w/years of experience re-positioning assets w/a proven track record.  Then share that w/your soon to be investor base...go to my site and listen to all 4 podcast interviews I've done on raising capital.  I'm pretty sure you will be energized and start thinking bigger, faster !!  You should start w/the end in mind.  How can I purchase a 100unit apartment w/n the next 12-18 months.  I need to find a deal and raise capital.  Use OPM, be conservative, leverage expert partners are some of the ideas here.  Don't be afraid to get a coach.  Are you serious or what?

Donald Scott · Answer

@Brian Adams wow, that's awesome. I will listen to your podcast immediately!

My gut feelings lean toward your strategy. I suppose I'm doing the same right now going from a triplex and duplex to the 22 unit I'm eying right now... not quite as large as your 130+ unit hah! Hope to get it under contract this week.

I would love to connect with you and talk more.

Donald Scott · Answer

Thanks for the input guys. Great ideas!

Rosston Smith · Answer

FAST.

Growth Strategy - Go big fast, or small, diverse and slow?

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