Can you have too few rental properties?
Real Estate Investor · Houston, TX · Member since 2013 · 18 posts · 2 votes
Can you have too few rental properties?
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Property Manager · Wyandotte, MI · Member since 2011 · 123 posts · 26 votes
12yIn one of John T Reed's books he talks about how a person can manage 30 or so units on their own, maybe up to 40 if they are superman, but after that it becomes overwhelming and they need to put systems in place and have other people take over some of the workload.
I agree with what @Marcia Maynard said above. Depending on the way you manage, somewhere between 10-20 units becomes difficult. You are too small to hire someone and too big to handle everything yourself.
My experience was as follows:
1-4 units: Anxious that rents wouldn't be paid and no major issues would come up. Any unplanned vacancy or unforeseen maintenance issue could be all of the cash flow for several months. All work completed myself
5-15 units: Less worried about unforeseen issues occurring. Started to develop and understand the systems and act more like a business. Ex. If someone couldn't pay rent, they get a 7-day notice. If they have to be evicted, it is only 10% or so of scheduled gross income. If something breaks it is still only a small percentage of overall income. While some problems seemed to occur in groups, it was still easier to manage because there was always a significant portion of the business running normally. Started to hire out handyman and rehab work.
15-30 units: Systems are in place. The worries and anxiety are less, but the workload has increased significantly. While I don't like it when there is a vacancy, turnover, or maintenance issue, I understand that it is just part of the business and go on with life. A call comes in, I dispatch it to the appropriate team member (handyman, plumber, electrician, accountant, lawyer) and pay for services when billed. There is also the benefit that I use the same tradesmen regularly and start to get preferential treatment. Also switched to property management software. I no longer do any maintenance work at all, just answer phones, do showings, manage contractors/tenants. But the bottleneck in the system is starting to become apparent. It is me.
30-50 units: It is obvious that I should to hire a person to take over the day to day operations. Not because it is a ridiculous amount of work, but because I have to be there everyday. Someone to answer the phones and direct calls to the appropriate tradesmen, someone to do showings, someone to do bookkeeping. The problem is that a full time employee would take a large percentage of the cash flow, the calls and showings are sporadic but last longer than the standard 9-5, and it still doesn't seem like enough work to have someone sitting in the office all day long. Feels like I am stuck again. The true test of a successful business is one where the owner could go away for a month and come back to the same operation he left. This would not be the case for me. Seems like the only option is to grow.
This is where I am today. (btw I still work a full time job)
-----------------------------------------
The plan is to grow the number of units, possibly by starting a property management company, and also by continuing to purchase for myself. I believe that if we can get to 120-150 units under management we will be able to justify a staff of 2-3 full time people and free myself up.
I'm sure there are other issues that will come up at that size and larger. I would love to hear the experience of anyone who is at that point.
Long post I know but that is my real life experience. I hope it helps you.
26 Replies
- 12yMark UpdegraffBusiness MemberReal Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 691 votes
It is easier to maintain low vacancy with fewer properties to worry about. I self managed at near 0 percent vacancy until I got past 10 properties. I'm still diligent about keeping it low but it is MUCH harder with more on your plate!
Updegraff Group Realty4.746 Reviews - Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes12y
Agree with @Mark Updegraff . I had pretty close to 0% vacancy during my first several years. My longest vacancy to date has only been 1 month and both times that occurred was right after a remodel (no showings until it was 100% ready to go) and during the winter.
As I obtain more properties, it's harder (and admittedly less of a priority) to maintain 100% occupancy. That being said, I'd rather have 10% vacancy on 20 units than 0% vacancy on 5 units.
I would say the only way you can have too few properties is if you have none!
- Real Estate Investor · Houston, TX · Member since 2013 · 18 posts · 2 votes12y
Thanks for the reply! I guess this idea is for people who are worried about some unforeseen catastrophe where vacancy spikes in their area and all of their rentals go vacant... And from the sounds of it, if you watch you business closely, that doesn't really happen
- Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes12y
It might be more of a question of critical mass--what kind of portfolio would it take to earn a good living without too much risk? Or at what point could you outsource management and still have plenty to live on? One property could do it if it were the right property.
- Investor · Delaware, OH · Member since 2013 · 224 posts · 64 votes12y
Tim, every real estate investor has different goals. Not everyone wants to be Donald Trump - some just want to make a couple extra thousand a month in retirement, and it's just a piece of their retirement planning diversification.
And I think the risk also depends on leverage, not just occupancy rates. Which would you rather own in a downturn: 2 paid for properties, or 10 properties that were financed with 20% down?
I'm sure they are right about the vacancy rates flattening out, but that's not the only factor to consider.
I have two duplexes, looking to acquire about 3 more, but probably won't go beyond that unless I plan on dropping out of my corporate job. I don't want two full-time jobs :)
- 12yChris K.Pro MemberInvestor · Baltimore, MD · Member since 2012 · 1k+ posts · 655 votes
I feel like theres just more to it than the number of units that you own. Piggybacking off of what @Pam R. stated it's how you own them. My personal goal is to own the least amount of homes at the highest cashflow possible cause at the end of the day it's the cashflow that matters!
Which would you rather?? Profiting $3000 a month off of 4 properties or $3000 a month off of 10 properties?? 4 properties would be less work than 10. 4 properties are much maintenance costs. 4 properties is less roofs to replace. If it gives you the same cashflow less is better.
With that being said Im not against owning a bunch of properties (I plan on growing) but I don't think the number you own is as important as how much you're making off of them.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes12y
Agree with @Michael Seeker and when I started and had few properties, I was on it showing units before they became vacant and getting a tenant to move in the day after the departing tenant left. Now not so much.
The 5 unit vs 20 unit is a bunch of crap imho, you can own as many or a few as you want. A good friend of mine has has rentals for 20 years and has 4. Its an easy number to manage and provides a nice income particularly as mortgages are paid down or off. Own as many as YOU want, and as many as YOU feel comfortable owning.
- Boise, ID · Member since 2014 · 40 posts · 13 votes12y
I agree with @David Krulac 5 v 20 is nonsense. Pick a # you like and go with that. Dont get hung up on this at all.
- Lender · Lenexa, KS · Member since 2013 · 119 posts · 80 votes12y
Tim - I have been in the real estate investment industry for 21 years, full time since 2001. I don't sell investment properties, so I have nothing to gain from my opinion. That being said, one of the biggest travesties is for new investors to own one or two properties and have bad luck with them - bad tenant, unforseen repairs, etc. That tarnishes their opinion on the benefits of owning investment properties. That is exaserbated by sales channels that only provide a one-year snapshot of a buy-and-hold investment. Then the investor expects that investment to perform that way in year 1. When it does not, the investor becomes frustrated/disenchanted. At a minimum, it should be a 5 year view, and then the investor will have a better long-term perspective, and the seller will not look like he misled them.
I feel that 10% - 20% of your rental portfolio (depending in its quality and management) will be performing sub-par at any point in time. Therefore, I feel critical mass is 5 to 10 properties. If you self-manage, then that is starting to become a job.
- Appraiser · Birmingham, AL · Member since 2008 · 54 posts · 4 votes12y
Totally agree.
- Real Estate Investor · Member since 2013 · 866 posts · 487 votes12y
Originally posted by @Account Closed:
I'm a newbie, and recently attended my local DFW Real Estate Investment club this Saturday. I heard this interesting idea about a buy and hold philosophy in relation to vacancy:
Most investors don't own enough properties. In fact, your goal should be to own at least 20 properties. Even further, the most dangerous time in an investor's career is when they own about 5 properties.
Obviously the exact numbers can be argued, but I agree with the logic. Once you own 5, you are at the risk of multiple properties going vacant, which could be devastating. Once you have about 20 properties, the vacancy rate among your portfolio of investments flattens out. Basically it's the same idea as diversifying you stock portfolio.
Any thoughts on this? It was one of my bigger take aways from this last meeting, definitely stuck with me for some reason
I voted for your post because I like the thought process behind it. Not because 20 properties is inherently better than 5.
There is safety in the herd, but honestly 20 properties doesn't really give you that safety. To be statistically 'safe' from a vacancy, natural disaster or other risk profiles, you need a whole lot more in differing geographical locations.
Most people don't really need that safety because they don't often face the risks they fear and if you self-mange you can control your risks in better ways.
Is 20 properties the right number for you? Only you will know.
- Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes12y
Ideally I think more is better because it forces you to get systems in place. With 20 props you are likely to be screening every month or so vs with only a couple you could go a year or two without screening. Same with using contractors and handymen. You only call a guy every year or so and you are a low priority. You call a guy every month and he'll be there for you as much as is possible. Volume creates efficiency if handled right.
I think it's easier emotionally to handle 20 units than it is 2 or 3. Sure there are more free time with 2 or 3 but that really is sitting on the sideline. You want to be in the game so having the 20 plus keeps you sharp and efficient.
With only a few properties it's easy to get lazy and not keep with the times. Laws and trends change. I have bought from an old time landlord that owned 3 or 4 properties and didn't even know about Craig's List. Tough to make a living when you are making buggy whips and everyone is driving cars.
OTH is know people with lots of property that just sits vacant decaying. Having lots doesn't mean you keep up but it can definitely help.
- Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes12y
I don't think there's any doubt that its better to have 20 than 5. I really think 10 is probably when things start "evening" themselves out.
While I understand some of the earlier posts about they could maintain 0% vacancy at under 10 homes, I think thats more difficult than it sounds.
To me, when you have 5 homes and 2 turnover in the same month, you're going to take a hit. Or if you have an eviction and/or an expensive make ready, you're going to take a hit.
When you have 20 homes, an eviction doesn't really bring you down as much as you think. Not if your other homes are bringing in rent.
I had a great run last year of 5 months at 100% occupancy. But at the end of this year, I had a vacancy and a no rent scenario on another house for 2 months. If I'd have had 5 homes, that would have been extremely painful. With over 20 now, it isn't that big of a deal in the overall scenario.
Its all about the total months of vacancy you have for the year against the total months of possible occupancy. My occupancy for the year - even with the two deadbeat renters - is still going to be over 96%. If I only had 5 homes and had the two deadbeat renters for 3 months or so, that would have dropped that number considerably.
Same with repairs. If you get stuck with a roof and a couple of hvacs in the same year and have 20 homes, not so bad. If you get stuck with a roof with 5 homes, thats going to really schew your repair numbers for the year big time. You dont' have as many homes with no repairs to offset it.That being said. I think 5 homes is still way better than none. You will make money but you may not make money every single year. You may have some fantastic years where you have no vacancy and little to no repairs and make a killing. Or you may have a year where you have a couple of turnover and a couple of big repairs and you break even for the year.
Thats what I think getting to that 10, 15, or even 20 number brings you. You will average things out so that you should make money every single year. You might still have a couple years where your profits are less and a couple where they're more. But you'll make money every year and will probably make roughly the same amount each year.
- Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes12y
I've always thought in terms of units rather than properties, as we invest in SFHs and plexes. My husband and I currently have 15 units. Buy and hold properties for retirement cash flow. A friend with about 200 units in Portland warned us about "the hell zone" (10 - 20 units) because he said you are then too big to do most of the work yourself and still too small to hire out most of it. Well, we are in the middle of the hell zone now, and we are experiencing this first hand.
To manage this volume, requires improving our systems and hiring the services of more trades people. That's good. Self managing the tenant interface aspect, doing turnovers, and filling vacancies is not nearly as easy or as enjoyable as when we had only a few units.
I'm wary of property management companies. It seems working with a property management company would require quite a bit of oversight and I'm not convinced the ROI would be there at this point. Since my husband and I both work full time in our careers, we do see the need to delegate more of the property management tasks now. The question is which tasks and to whom.
If we increase our portfolio to hit that sweet spot of enough units to cover the costs of either on-site management or the services of a PM company, will we still find joy in owning and managing residential rental property? Will it still be a good investment? As fulfilling an endeavor? Twenty or more units seems like a good goal and will help us get out of the "hell zone". It really is an individual choice in the long run, isn't it?
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes12y
The issue you bring up is a factor. (multiple vacancies when you only own 5 properties) However this is easily handled by having a proper amount of cash reserves. And proper cash reserves is important with any size portfolio
- 12yDeborah BurianPro MemberRental Property Investor · Oklahoma City, OK · Member since 2013 · 1k+ posts · 412 votes
The answer is going to be different for everyone and that has been well covered before this post. That said, I've had 5 and 10 and 20 and the more SFHs the merrier/easier for me. Multis I still have a stiff learning curve on but I bet it's true there too. Ditto @Ned Carey on having reserves.
- Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes12y
@Account Closed
I own 4 houses and manage 7. I find that the more I have the easier it gets because a lot of my work is duplicated. To add another house does not double my work load it only adds 10%.
That being said, everyone has to start some where. Markets change and it does not always make sense to invest. It think it is equally prudent to know when to buy, when to hold and when to sell.
- Investor · Member since 2009 · 132 posts · 30 votes12y
Interesting Topic and I agree with a lot of the point being made. Have just a few units doesn't requires solid systems in place and every time something goes wrong, its an inconvenience and fire drill. When you only screen and lease once a year, its hard to through and probably feels like a new process each time. Once you hit a certain threshold, it requires people, processes and systems to be in place or you will pull your hair out. Scalability is critical. Personally speaking, i was more stressed with 10 units than I am now with around 50 doors or so. A new property doesn't require a tremendous amount of effort to onboard if you have systems in place to absorb it.
- Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes12y
Often when I tell people how many rental properties I have they tell me I must be crazy because they had/have 1/2/3 rental properties and it was a nightmare. I always tell people the worst thing you can do is have a couple rentals, especially if self managed, because when you have a major issue it's a big hit for you and you're not setup to handle it. With the number I have I know I'm going to have a major issue every month (e.g. eviction, unit trashed at move out, new roof).
The biggest benefit to having a lot of rentals is the ability to have a full time maintenance person to handle all of the little stuff. The tenants call him directly and I never hear from many of my tenants. I also have established relationships with all contractors in all different trades so when I have a roof issue, an A/C issue, a plumbing issue, or an electrical issue I already have someone in place to take care of it at a reasonable price and I don't have to waste all day on it.
You can just just a couple rentals but if you go that route you really need to have a great property manager that's going to be on top of everything. A bad property manager is worse than just winging it yourself because nobody else is going to care about your property or its success as much as you do. You also need to be more careful with your budgeting and keep a good amount of reserves because one big problem could easily exceed your cash flow for the year on a financed property.
- Property Manager · Wyandotte, MI · Member since 2011 · 123 posts · 26 votes12y
In one of John T Reed's books he talks about how a person can manage 30 or so units on their own, maybe up to 40 if they are superman, but after that it becomes overwhelming and they need to put systems in place and have other people take over some of the workload.
I agree with what @Marcia Maynard said above. Depending on the way you manage, somewhere between 10-20 units becomes difficult. You are too small to hire someone and too big to handle everything yourself.
My experience was as follows:
1-4 units: Anxious that rents wouldn't be paid and no major issues would come up. Any unplanned vacancy or unforeseen maintenance issue could be all of the cash flow for several months. All work completed myself
5-15 units: Less worried about unforeseen issues occurring. Started to develop and understand the systems and act more like a business. Ex. If someone couldn't pay rent, they get a 7-day notice. If they have to be evicted, it is only 10% or so of scheduled gross income. If something breaks it is still only a small percentage of overall income. While some problems seemed to occur in groups, it was still easier to manage because there was always a significant portion of the business running normally. Started to hire out handyman and rehab work.
15-30 units: Systems are in place. The worries and anxiety are less, but the workload has increased significantly. While I don't like it when there is a vacancy, turnover, or maintenance issue, I understand that it is just part of the business and go on with life. A call comes in, I dispatch it to the appropriate team member (handyman, plumber, electrician, accountant, lawyer) and pay for services when billed. There is also the benefit that I use the same tradesmen regularly and start to get preferential treatment. Also switched to property management software. I no longer do any maintenance work at all, just answer phones, do showings, manage contractors/tenants. But the bottleneck in the system is starting to become apparent. It is me.
30-50 units: It is obvious that I should to hire a person to take over the day to day operations. Not because it is a ridiculous amount of work, but because I have to be there everyday. Someone to answer the phones and direct calls to the appropriate tradesmen, someone to do showings, someone to do bookkeeping. The problem is that a full time employee would take a large percentage of the cash flow, the calls and showings are sporadic but last longer than the standard 9-5, and it still doesn't seem like enough work to have someone sitting in the office all day long. Feels like I am stuck again. The true test of a successful business is one where the owner could go away for a month and come back to the same operation he left. This would not be the case for me. Seems like the only option is to grow.
This is where I am today. (btw I still work a full time job)
-----------------------------------------
The plan is to grow the number of units, possibly by starting a property management company, and also by continuing to purchase for myself. I believe that if we can get to 120-150 units under management we will be able to justify a staff of 2-3 full time people and free myself up.
I'm sure there are other issues that will come up at that size and larger. I would love to hear the experience of anyone who is at that point.
Long post I know but that is my real life experience. I hope it helps you.
- Real Estate Investor · Houston, TX · Member since 2013 · 18 posts · 2 votes12y
Phenomenal responses, thanks everyone! It seems kind of silly to worry about something like this when I haven't even purchased my first property yet, but it's a great thought experiment and helps me grasp some of the challenges of real estate investing.
- Investor · Saint Paul, MN · Member since 2012 · 128 posts · 56 votes12y
Can you clarify your statement "That is exacerbated by sales channels that only provide a one-year snapshot of a buy-and-hold investment."
A buy-and-hold is not a one year deal. What sales channels do you mean?
- Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes12y
To self manage 5-6 units while you work full-time is optimal IMO. Having a full-time job while owning this amount of RE is the safest way to go. Buy good stuff and the future is good.
20 units is more debt, more risk, at least in the short-term.
- Investor · Kansas City, MO · Member since 2013 · 465 posts · 170 votes12y
That was a good read and something that I had been tossing around in my head for future plans. Thanks for the read!
- Real Estate Investor · Desoto, TX · Member since 2013 · 560 posts · 528 votes12y
Instead of focusing on # of properties, I prefer to focus on meeting my desired target passive income I wish to generate from the properties. The number of properties is not all that relevant to me in the big scheme of things. If I can acheive my target with 5 houses then 5 houses it is. If it takes 20 then 20 it is. Different strokes for different folks :)
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