Hey, this is Devin, and I want to talk about why bigger is better in multi-family apartment investing.
What do I mean by bigger? Well, really anything above five units is considered multi-family, so a six unit apartment complex, that’s considered multi-family for different reasons. So is a 200 unit apartment complex.
I want to talk about three reasons why bigger is better. The first one that I want to talk about is management. If you’re using a third party property management company to manage this property, it’s going to be tough to have the budget on a smaller property; 10 unit property, 15 unit property. You’re just not going to have as many dollars to play with, and really, the professional management companies prefer bigger properties because it’s got to be worth their time. They’ve got to be able to generate a decent amount of revenue on it. For the management companies, as the properties grow bigger, you’re going to see their fee, as a percentage, drop. Now, dollar-wise, it’s obviously an increase, but as a percentage, your payments to the property management company will go down. You definitely do want management on the property.
Another thing I want to talk about is payroll. If you’ve got a 20 unit property, you’re likely going to have part-time staff. Maybe you’re going to have somebody on-site that is managing the property. Maybe it’s a resident that you’re paying, or you’re giving a rent concession. You really have a lot of payroll dollars to play with on a smaller property, like a 20 unit property. What this means, is that you, as the owner, can essentially be more involved in a lot of the day-to-day. You might be signing leases. You might be having to spend a lot of time at the property, and that may not be ideal.
Now, if that’s your thing, you want a little property, and you want to be involved in every aspect of it, that’s great. Everybody’s got their own prerogative, but I’m talking about, in the context of syndications and raising capital, and putting together investment that’s going make great return for everyone.
With a larger property, 100 units plus, you’re going to have bigger payroll line item dollars in your budget. You’re going to be able to afford some full-time staff; full-time manager, full-time maintenance person. Because part-time staff is going to be hard to find, and they’re going to be hard to keep. As you go bigger, you go 100 units plus, you’re going to have that line item for staff in your payroll. As you go even bigger, you get even more economies of scale.
The third thing I want to talk about is fixed costs. Our company’s doing a syndication, which means we’ve pooled capital from investors. Our last deal had 30 investors on it. It was a 106 unit property. We’ve got a number of investors. We put in our own money. That’s what syndication is, we go in and we buy this property. Now, there are some fixed costs associated with buying that property. Things like legal. We’re going to have to form some LLCs. We’re going to have to create what’s called a private placement memorandum, so that we are in compliance with the Securities and Exchange Commission.
Those costs are the same whether it’s a 20 unit property or whether it’s a 200 unit property. Now, some attorneys may charge a little more for the larger property, but in general, we’re still going to have to pay for a PPM. We’re still going to have to pay some legal and startup costs. And as you go bigger on a larger project, those fixed costs are a smaller percentage of your overall project.
You can have marketing on a property. You might have to pay for some websites, or some subscriptions or marketing services. They might be the same on a 70 unit property versus 150 unit property. And as you go to the larger property, those dollar amounts, as a percentage, are smaller.
You’ve just got more budge dollars to play with. You’ve got more professional management you can use. You’ve got a better line item for your payroll, so it just creates more of a professional business, than kind of a small Mom and Pop operation. Furthermore, as you go up the scale to bigger properties, you’re typically dealing with more sophisticated buyers and sellers, which means the financials may be a little bit cleaner. Not always. I’ve seen some interesting financials on bigger properties. But as a typical rule of thumb, the bigger you go, the more professional buyers and sellers you’re dealing with.
Three reasons why bigger is better in apartment complex investing. Hope that helps.