Why do a lot of investors stay away from medium to larger multis?

[Justin Westmoreland]

I have been listening to a good amount of podcasts on here and it seems to me that most investors who invest in multi family are staying small meaning anywhere from 2-15units. I understand that it depends on each individuals goal and it takes a larger deposit to get into medium/large multi family. Are these the main 2 reasons why a lot of investors stay small? Or is it just fear and they are just thinking small? What are your opinions?

[Jonathan Twombly]

@Justin Westmoreland

I got started by syndicating a 102-unit property.  But I was in a unique position - I'd been in the business for a few years and had made investor relationships already.  

But a lot of problems arose that I did not anticipate - namely the net worth requirements for getting debt on the property.  One of my partners had a big balance sheet, and he co-signed on the loan, but even though the debt was non-recourse, it freaked him out and I had to drag him kicking and screaming into it.  After 2 deals, he flat-out refused to sign any more, and I had to find a different balance sheet partner, someone from the real estate world who thought was no big deal to sign on a non-recourse loan.

This experience led me to think about what I would do if I were starting over again.  I would definitely go smaller at first, to start with properties that are within my personal net worth (or within the net worth of a willing partner group) and then build up from there.

You lose some of the advantages of scale this way, namely that apartments under 125 units can be tricky because they require labor costs that cannot be spread over as many units.   But, if you are buying in a single market, you can start to share these costs between properties and spread them over more units as you grow.

And, as you grow, your net worth will rise and you can do bigger and bigger deals, either on your own or with syndication partners.

If I were starting all over, my plan would be to start with deals I could support on my balance sheet alone.  (I'm talking about the debt here, not the equity, which I would still syndicate.)  As my net worth grew from the carried interest I would get on each deal, I would try to make each deal just a little bit bigger than the last one.  I would definitely stay in one market until I had enough units there to make all the investments very efficient, and then I would consider moving to another market and establishing another node.

I really encourage people to think big.  Do not stay within small buildings.  But start there, and then grow to bigger and bigger properties over time.  I think this is a sustainable way to do things.