I am often asked this question by many of my students: “How many units should my first deal be?”
In life, a difficult question usually requires other questions to arrive at the answer. This article will attempt to answer this prevalent question by detailing other important factors that will be vital in the decision-making process and allow the reader to choose what path is best for him or her.
Here are a few factors that will impact an investor’s decision on how big their first multifamily purchase should be:
- Mindset/Comfort Level
- Business Plan/Preparedness
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The world of real estate comprises a variety of niches, such as fix and flip, buy and hold, and wholesaling. When I purchased my first investment property, my experience was limited to my parent’s investment philosophy, so I focused on purchasing a small three-unit home. I had no experience in the field, so I decided to begin coaching and enroll in a course to acquire my real estate license to sell homes. My goal was to understand the responsibilities of an agent and learn the laws of real estate, not collect commissions.
If I had done things is reverse and had received my education, there is no doubt in my mind that I would have focused on a larger asset. Only a few years later, my partner and I acquired our first 25 units together, and we were able to scale up to larger properties rather quickly.
Experience plays a huge role in deciding the size of property that an investor is willing to start with. A wholesaler who decides to jump into the buy and hold model already understands how real estate works and has an advantage to someone just starting out their investing career.
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Comfort level can be confused with experience. Most investors have either purchased a single family home or have rented one out in the past. There is a level of comfort dealing with this asset type, and they are often misguided into thinking that a larger property is more difficult to purchase and manage than a smaller one.
This level of thinking dovetails perfectly into the mindset of the investor. When we interviewed Grant Cardone and asked him what he could have done differently, the only thing that came to his mind was: “Think big. Don’t even waste your time on the small stuff. It’s just as hard to buy 10 units as it is 100 units.”
This may be difficult for the beginning investor to grasp, but his statement does have certain truths. Some of us are just wired to think big and shoot before we aim. Others (including myself) are programmed to be wary, to consider the options and act when we have all the facts. There is no right or wrong answer. I now totally agree with Grant that our goals need to be supercharged and huge in order to lead a purposeful and passionate life.
One of the main drivers behind my decision to buy a smaller property was also caution. I could handle mistakes on a smaller property, but what happened if I purchased a big property and ran into difficulties? Would I be able to overcome these problems? In the end, larger properties experience different problems, and the only way to prosper with bigger properties is to acquire them and take your lumps.
Where am I going to find the money for the deal? This is one of the largest hurdles for the beginning investor, and it often limits the size of property that can be acquired. Novices are often unaware of techniques, such as owner financing or raising private money, to aid them in the down payment. The ability to attract the funds to invest will limit the size of your first investment.
When Jake and I began our search, we were confident in the size of our acquisition because we had formed a partnership and invited my brother to participate with us. We all owned 33% of the investment, and were confident in our ability to secure financing from the bank. The bank was more likely to fund a property with three investors each signing a personal guarantee.
I am a huge advocate of partnerships only if the partners share the same goals and visions for their future. Jake and I both wanted to invest in multifamily assets to generate cash flow so we could both “retire” from our current occupations. The partnership allowed us to buy a larger asset and scale up the business. You should consider seeking a partner if your goal is to start with a larger property.
Many investors who jump into the multifamily space are often unprepared to make the transition. The business model is different than other niches, and the investor needs to be prepared and develop what I like to call a “credibility book,” a basic business plan that highlights experience, current portfolio and successes, and a detailed plan of how the investor is going to profit with his investments.
Most sellers and bank will not take you as a serious investor if you lack the preparedness or the credibility to close the deal.
As you can see, it is extremely difficult to advise anyone on where they should start. All of the factors mentioned above play a key role in a person’s decision. Ultimately, it all boils down to a person’s ability to convince himself he is ready to buy a multifamily, and then try to buy the acquire the biggest asset possible.
Decide why you are choosing multifamily investing. It can be to supplement retirement income, create some extra spending money or take control of your financial destiny. Next, study these five factors laid out and apply them to your life. This will allow you to do some soul searching. Finally, create a business plan and choose a property size that YOU feel comfortable with.
How large of a property are YOU planning to buy for your first multifamily purchase?
Let me know your thoughts with a comment!