Focus on growth or profitability?

Question

We’ve been in heavy growth mode for the last 2 years but are rapidly approaching 200+ units over 20 something buildings. At what point do you switch over from growing the portfolio to focusing on maximizing profit from the existing portfolio? Is it when you run out if money or when you stop finding good deals? Or something else?

We do actively manage our current portfolio and increase rents/monitor expenses but there are only so many hours in the day. My focus has been growth oriented but I think we’re starting to hit a tipping point. I’ll be interested in hearing other peoples thoughts on this.

Best,

Jon

Nathan Gesner · Answer

What's your real goal? My goal was financial independence. I wanted the ability to quit working and live off my rental stream if I needed to - or wanted to. I reached that goal and - if I wanted/needed to - could quit my job today and still maintain my lifestyle with my income stream.

Once I reached that point, I set a new goal. I am still capable of working at my job, and I can keep growing my portfolio, so I'm now focused on growing it to a point that will allow me to give $XXXX to charitable organizations. I also want enough money to buy a vacation home in the south and possibly another in Italy.

As you reach goals, you should set new goals and then work towards those. Keep in mind there's some additional security in properties that are fully paid for, but you also lose some major tax benefits of a leveraged property.

Joe Splitrock · Answer

Always focus on profitability. If you are adding more and not taking care of the existing assets, you are just going to have more struggle in the long run.

Eric James · Answer

So you have something like the equivalent of 67 units full ownership. It's personal choice but I'd probably be looking to grow a bit more. And for me the step after growth mode has ended would be more about  getting units paid off.

Eric James · Answer

It defin depends on how much your share in those 200+ units is. It's very different if you own all these with your spouse, or if you have a 5% equity share of these and other investors have the other 95% share.

Crystal Smith · Answer

There's the age old "If you don't grow, you die" But without profits how can you grow. Given that for us when we acquire we focus on making an asset profitable & self sustaining; then we look for a new asset. It's not always a real estate asset but it may be one adjacency from Real Estate.

There's one thing in your comment that's interesting- You state "There's only so many hours in a day" My humble opinion- Time to start mentoring/training someone to take over some of your responsibilities so you can focus on growth.

Aaron W. · Answer

@Jonathan Bombaci

I think the answer is dependent on your goals.  What is your why on investing?  What goals do you need to accomplish the why?

You should have both in mind as you scale your portfolio.  Does your portfolio still work if you were to hire a PM to manage?  Hopefully, this was built in to your analysis before you acquired the property.

You should always be thinking how you're going to make a property profitable or more profitable before you purchase it. It could be as simple as rent increases or rehabbing it to add more value at the refi.

With growth, we always think about partnerships.  It is better to have 20% of a watermelon than 100% of a grape. With partnerships, you can focus on what you're good at and find a partner(s) good at the others.

Best of luck!

Ian Walsh · Answer

I found profitability was much more satisfying over chasing units.

John Warren · Answer

@Jonathan Bombaci what a fascinating post. I don't have all your answers as I am in full growth mode here in the Chicago suburbs pushing towards 82 units. I can tell you that this is a real issue that I am just starting to unpack. I am building out my own management infrastructure for the portfolio and that takes time as well. My plan, personally was to get to 100 doors with a full time manager, full time maintenance tech and some admin support in place so that I could focus more on the higher level parts of the business.

Paul Moore · Answer

@Jonathan Bombaci congrats on your success!  To me it comes down to two issues with two elements in each. Math and Federal Reserve/HUD policy.

1. Math:  Your appraised value = Net Operating Income/Cap Rate.  A. By making improvements, you can increase your NOI. This leads to increased asset value. Return in Asset % (ROA)/(1-LTV) = Return in Equity (ROE).

B. Right now, cap rates are at a historical low. Improving your properties could leave that low cap rate at the same level or help nudge it downward (increased price).

Math summary:  Act quickly to improve NOI and improve your cash flow and appraised value.

2. Federal Reserve/HUD Policy.

A. Interest rates hover in the range of 5,000 year historical lows (seriously). This is helping cap rates stay compressed which is good for value and means your refinance could allow better relative cash flow.

B. Policy: Covid has caused slightly relaxed lending standards.

So where could this lead you?   Improving the property could allow you to refinance while NOI is higher and cap rates and interest rates are low.  This is an optimal time to extract lazy equity and puts you in a position to buy more properties. You are in an enviable position and I would take advantage of it ASAP!

Good luck.

Jonathan Bombaci · Answer

@John Warren happy to connect I do already have a PM company (Simplified Management) stood up and 2 full time admins that support my real estate team but everyone has plenty of work to keep them busy at the moment.

@Eric James great clarifying questions which I should have included in the OP. I own:

100% of 27 units

50% of 53 units

10% of 132 units (large site property syndication)

I am the primary manager across the portfolio.

Focus on growth or profitability?

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