When you get to be pretty smart and rather accomplished, you find yourself in somewhat of a danger zone. The danger is represented by the fact that your prior successes tend to back you into a tunnel-vision perspective on life and business. Because you know what has worked for you in the past, you can fall into believing that the same will work in the future, that your way is the only way, etc.
Well, it doesn’t take a genius to note that everything in life changes over time, that life and everything in it is cyclical. And if so, your perspective and frame of mind necessarily and proactively must evolve.
One way to help facilitate this is by surrounding yourself with smart people of differing perspectives, and one vehicle to accomplish this can be a mastermind group. I am fortunate to have many, many smart people on speed dial, and last week I had the pleasure of spending time with two of the smartest guys I know.
The setting is Hawaii, Honolua Bay on the Island of Kawaii. Do you recognize these two gentlemen?
In case there is any confusion, the one with the out of control beard is Brandon Turner, and the other is our good friend Darren Sager. On Darren’s plate is a gluten-free waffle. He loved it, and it helped him maintain his figure, which, considering his age, is no small thing.
While in Hawaii, Darren turned 50. Happy Birthday, Darren!
He looks fantastic, doesn’t he?
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What Did We Discuss?
We talked about lots of things. It was a very productive getaway, indeed. One topic, in particular, comes to mind, and it is this:
Grant Cardone loves to offer advice that folks shouldn’t mess with houses and small multifamily and should go to the big stuff right away. Brandon, Darren, and I talked about this in detail, and in my opinion, we have to accept that Grant’s advice is both very wrong and very right at once.
In this article, we will explore both sides of the argument.
Why I Think I Can Help You
Brandon, Darren, and I talked a lot on the subject, but of the three of us I may be most equipped to speak to this. I started with single family residences (SFR), and it only took four of them for me to figure out that structurally SFR as an asset class is a fool’s game. The numbers are not there, and the management infrastructure is a nightmare.
I switched over to small multifamily in 2006 and stayed there for about eight years, working with everything from a duplex to 10 units. I remember looking at some 24-40 units, but never pulled the trigger on those; something didn’t feel right. I wasn’t sure what felt wrong about these at the time. I know now.
And nowadays I syndicate apartment communities.
So, this conversation is right up my alley because I’ve stood on every step of this ladder and have internalized the benefits and drawbacks of each. I am hoping you find value in this.
Related: Why You May Have Grant Cardone’s Concept of “Massive Action” Dangerously Wrong
Grant Cardone is Right
Let me start out by saying that structurally, Grant is right—going bigger is simply a better idea by any investment return, OpEx, and CapEx line item.
This is a long—in fact, very long—conversation. But the term I want to coin today is #exponentiality. In simple terms, a 1% return on a basis of $100,000 is $1,000. But, the same 1% return on a basis of $10M is $100,000. Now, I’m not sure about you, but I’d rather get paid $100,000 than $1,000.
Thus, in terms of the amount of money being made, this is not a contest—go big or go home. Cardone is right here.
I’ve written about this on the BiggerPockets blog as well as mine, but as it relates to management the truth goes like this:
A professional property management operation is one that has a construction arm, legal department, and an accounting/reporting department. This is an operation with well-tested systems, which come from years in the business and thousands of units under management. This is an operation with deep commercial contracting relationships, in-depth knowledge of and relationships with the representatives of the municipalities they operate in, etc.
In addition to the above, a professional management infrastructure for apartments involves payroll for on-site employees and a regional manager overseeing them.
Now, the thing to understand is that all of the above costs money, and in order to underwrite this cost, the project needs to be of a particular size. Let’s just call it “large.” Such a property manager as described above knows that you can’t afford them on a 40-unit, and they can’t afford to service you properly on a 40-unit. So, they are not interested.
I will address in a bit why this is such a problem. For now, let’s just say that there are only two options available to you from here: You are forced to either do the property management yourself or hire the gal or dude at a local real estate brokerage office who handles 100 units for small-timers. Neither of the above is a particularly enviable circumstance. In fact, I did it for a decade—and, well, no freaking more!
Cardone is right here as well: Go big or go home, as it relates to property management.
We only buy value-add deals. Why? It’s a separate conversation as to why, and if you want to have that conversation, we can, in another article. For now, let us agree—we only buy value-add deals.
That said, there is a lot of construction happening in these deals. And with construction, we have issues of material cost and sourcing, labor cost and sourcing, and project management.
Relative to project management, we are right back to talking about management, and the same realities exist—either you are pulling your hair out to keep subs on task, or someone else does it for you. On a small project, it has to be you because you can’t afford for it not to be you. On a large project, there is enough income to pay people so you can have a life.
So, here again, going bigger makes sense.
Then there is the issue of sourcing materials. Do you think you can get better pricing on kitchen cabinets and granite if you do 4 units or 100? How about flooring and paint? How about fixtures? And how about labor?
Two months ago, we closed on a 98-unit. It was at that time called Silver Tree. Now it’s Canyon 35. You can read about it here.
As we speak, work is going on:
I can tell you that we can do a 1×1 apartment at a cost of about $7,350 if the bathtub does not need to be resurfaced—and $7,550 if it does. Add to this about $100 for 2×1 and about $300 for 2×2. This includes new cabinets in the kitchen and bath, granite for kitchen and baths, underhung sinks throughout, appliances, lighting and plumbing fixtures, hardware, paint, and all of the labor.
There is absolutely zero chance I could touch this pricing remodeling a small multifamily. And in SFR, if you are good at what you do, you’ll spend $8,000 on the kitchen alone, more if you go with granite. That’s if you are good!
So, once again, Grant is right—going bigger affords efficiencies.
Dude, I’ll tell you what. The most difficult financing to obtain is residential mortgages for your 4 units and less. The qualifying process is akin to a colonoscopy. They look at everything and they look everywhere.
Not much better is commercial portfolio lending. It’s definitely better but still requires personal recourse, and while more emphasis is placed on the asset, the bank still looks at you quite personally.
On the other hand, with the big stuff, the options for financing are endless, and the qualifying process is easier. Why? Because they look at you, but not really. They know you can’t and won’t repay the debt if things go badly, so they focus on the asset and who will be managing said asset.
The thing is, lenders won’t even think about loaning to you if you think you can manage the asset yourself—it’s a professional job that a professional should do. They know that professional third party property manager will be managing the project. As such, the lender is underwriting the property manager more than they underwrite you, which takes me back to the earlier discussion: If what you’ve bought is too small to afford/attract professional management, this is a problem in a lot of ways, including the debt.
By default, this pushes you into larger assets since this type of a professional property manager will not manage small stuff.
Grant is right again—go big or go home.
But… Grant Cardone is Wrong!
Here’s the thing. Any suggestion that a newbie who can’t tell a rafter from a footer, who’s never signed a lease, who’s never qualified for a loan, who’s never experienced the joys of eviction, and who’s never written a business plan much less executed it should stick his/her nose into the big stuff is insane at best, criminally misleading at worst, and big-time guru on balance.
It’s not like you know anything about construction. It’s not like you can raise $5M from partners. And, most importantly, it’s not like you know what a good deal looks like.
And something else you don’t know is how much mistakes in real estate hurt!
So, What Should You Do?
I have no idea. I don’t write articles to give you answers. I write to make you think. And all I can tell you is what I did and what my friends did. You figure it out from there.
I can tell you that I learned from making mistakes. I could not conceptualize large apartments any other way than growing into them. But I eventually arrived at a point in my intellectual worth that now enables me to play in the big leagues. I still have a portfolio of small multis, but likely not for too much longer.
My partner Sam Grooms is a CPA with a Deloitte pedigree, who can see stories in numbers that 99 percent of people just aren’t able to see. Aside for syndicating with me, he seems to always have two flips going on. And now, he is starting to teach as well since we are doing a live event in Phoenix in January.
Darren, aside for being a hugely successful realtor to the investors, is continuing to stick to his model of buying extremely well-located small multis in Northern Jersey, close to transit and with the eyesight of Manhattan. He is of the mind that fewer doors equal more cash flow. Works for him!
Brandon Turner makes good cash flow on his portfolio, buys mobile home parks, and writes books that generate very good residual income.
Both Darren and Brandon invest with me for diversification and access to other markets—and for the fact that both of them are kind of maxed out with how much they do, and it’s time to diversify into more passive forms of cash flow.
You see, everyone has angles. Everyone is diversified with activities and revenue. Whether it’s classical training or trial and error, all of us study and learn. One thing none of us did was jump into large multifamily right away.
What do you think? Is Grant Cardone’s “go big or go home” principle feasible for newbies?
Weigh in with a comment!