Should You Invest in a Small or Mid-Sized Multifamily Deal? Get the Pros & Cons Here!

by | BiggerPockets.com

These days, it seems like everyone wants to invest in multifamily. But what sized multi should you focus on? There are pros and cons to both, but what are they? Should you invest in a small 15-unit complex or stretch to the 50 or 75-unit deal? Which is a better, more lucrative investment long-term?

In today’s video, I go into detail on the topic and give my definition of small and mid-sized deals and why I break it up that way. I go into the biggest downside of mid-sized multifamily investing and why it exists in today’s marketplace. What’s the biggest cash flow killer on a small multi that is not a real factor on mid-sized deals? Watch the video to find out!

Related: 4 Ways Technology is Shaking Up Commercial Real Estate (& Why Multifamily Will Pull Ahead)

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Should You Invest in a Small or Mid-Sized Multifamily Deal?


So, this is a way larger conversation than I could get into in a 10 minute video, and I’m hoping we can keep it going in the comments section. I didn’t get into some of the other factors that affect mid-sized deals, such as additional services you have to consider (landscaping and trash removal to name a few). I also didn’t get a chance to talk about how management affects both deal sizes.

What are your thoughts?

Leave a comment so we can continue the conversation!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

14 Comments

  1. Christopher Smith

    Are there roles in larger Multi’s for primarily passive investors providing cash? I have a number of SFRs which have done great (acquired them at the bottom of the housing crises in 2011-2012), but I am not sure I could really add much expertise when it comes to active participation in a large Multi project. However, I could easily see myself as a limited and perhaps even a general investment partner in such an activity.

    How would I go about soliciting for that type of participation?

    • Kevin Leonce

      There are roles in larger multiunit properties for investors who are providing cash only. You can network on the BP forums, through meetups, various social media investor groups etc. to connect.
      Possibly we can connect as well on a deal.

      • Matt Faircloth

        Hey Christopher,
        Great question. Most passive investors just provide cash into the deal. Others become something called a “sponsor” meaning they provide their credit and assets as additional collateral to back the deal (similar to a personal guarantee on a single family home loan). Doing this will get the investor more equity in exchange for the larger risk they are taking. I have also worked with passive investors that brought other things to the table such as helping raise capital from their network, providing vendor contacts, and even acting as another set of legs once the deal is up and running. All these are optional but if the investor steps into one of these roles there is additional equity to be earned in exchange.

        With regards to investing passively, do your homework first on markets you want to consider. Then as Kevin said surf the forums and BP for active multi family investors in those markets. Make sure to check references and confirm that they have a track record of success in multi family. Good luck!

        Matt

        • Christopher Smith

          Thanks Matt, these are all some very good thoughts.

          I do have my Prop Manager in a Non Local market where I have SFRs currently keeping an eye out for potential multi deals where my input (at least up front) would be primarily passive. I’ve even run by him the idea that we could participate together in such deals (so he knows that I am serious) and he seems open to the idea. Of course since these investments would be at quite a distance (Midwest), I would be relying primarily on his expertise for selection and administration. I would be a money guy until I get some experience under my belt with multi s.

          I would even try to do this locally (where I have a number of SFRs as well), but my local market (East Bay CA Area) is so totally saturated with Pacific Rim money that most multi’s are simply not attractively priced. Apparently the overseas money’s first concern isn’t profitability, its just finding a safe place to migrate funds out from local country jurisdiction, so prices for local multi activities here have been bid up in price so far that expected return rates are nil.

          I will try to do a little more exploring on BP to see if I can catch a connection or two that might lead to some interesting opportunities.

          Thanks again

    • Mike Dymski

      Hey Christopher, best way is to network…there are lots of investors looking for capital…and some that would be willing to show you the ropes (and others that would not). Most apartments complexes are funded with OPM (passively), whether it be a REIT, insurance company or a lead investor who sponsors the deal using primarily passive investors’ capital. Good luck with your search.

    • Matt Faircloth

      Hey Norman,
      Preferred returns can be win win’s for the LP and the GP. They give the investor a more predictable return while giving the GP more equity which can be monetized by the GP later when the building is refinanced.
      Matt

  2. Jerome Kaidor

    Economy of Scale: I own 52 units in Fresno, CA. Air conditioning is a big deal. I found the best AC contractor in town, and give him a LOT of business. I’m good to him – I authorize work without fuss, have him do preventive maintenance off season, and pay my bills promptly. He’s good to me – fixes it once and fixes it right. I boast to prospective tenants, with confidence, that we have working central AC. That’s a big deal in the CA central valley, which sees months of triple-digit temperatures.

    Now, if I had a couple hundred units, I might seriously consider hiring my very own HVAC tech…

  3. Mike Dymski

    3rd party management is the biggest con to both of these asset classes. There is a management void in the 10-75 unit space in many markets. Apartment management specialists start at 75’ish+ units (i.e. on site management) and SFR management specialists do not have apartment vendors.

    • Matt Faircloth

      Hey Mike,
      Thanks for the comment. I agree. I self manage everything we own below 30 units. We do own buildings between 30 and 75 doors also and found that there was a bit of a “learning curve” in there for the management company. They are doing well now but it took around 5 months.
      Matt

  4. Matt – very good discussion and break down of investment class. Do you see a large disparity between the return on investment between class sizes? Is the average small deal more profitable (% ROI or IRR) than the average mid/large deal?

    • Matt Faircloth

      Hey Lane,
      Great question. It’s hard do say as it goes deal by deal but on average I do see that the smaller deals are better. In the video I mention that competition is driving up the price on the mid sized stuff, which is causing lower CAP rates and ROI. BUT, once you get into a mid sized deal that makes sense your opportunity to increase value through rent increases and expense reduction is greatly leveraged by the amount of units in a mid sized deal. So short answer is yes mid sized deals are leaner up front but you may be able to catch up over time.
      Matt

  5. Robin Croen

    Hi Matt,
    Can you speak to how to get started in investing in the small size class multi unit buildings (lets say 5-20 units for the sake of this question) when you have little to no experience with REI? For someone who is just starting out, how do you even approach the bank or a private lender asking for this kind of loan, or is this type of property more than an inexperienced investor should look at? I would think you’d need to provide some kind of credentials or track record of successful deals before anyone would want to partner with you.

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