Does Size Matter?

Dan Austin: [0:00] Hey there. Welcome back to another episode of the collecting keys Friday focus. If you're new here, these are the episodes of where Mike or I dive into a specific topic. We like to do Friday focus case study episodes with the folks that are in our scale community, where we do a deep dive on their wins and losses and what those look like. Sometimes we like to go on a rant. I'm Dan Austin, and I will be your host today. And I wanna talk about an age old discussion, and that is does size matter? And this might not be what you're thinking, when I say size matter, or does size matter, I'm talking about the number of units. And when I say units, it's not what you're thinking. I'm talking about the actual number of units that you have in a single building. Meaning, should you go and search for larger properties? Twenty, thirty, forty, hundred units? Or should you kinda dabble in the single family duplex, triplex, quad, six, maybe up to 15 units, 16 units, something like that. Because I don't believe that there's a right or wrong answer, but there are certainly pros and cons to each. I know people that specifically look for anything that is like a 10 plex and below. I know people that are looking for a 100 and above. I know people that just dabble in single family homes, and partially this will depend on where you're marketing, because some markets, they're really known for their duplexes. Some markets are really known for their eight units, or maybe there's some markets that have larger, older, you know, 48, 60 unit buildings. So that that'll play a role into it, location, and what your market will bear, and culturally, what people, what their living style is, and that also might be associated with income levels and socioeconomic statuses. You know, some areas, it's probably more common to live in townhomes, where you know, in our area, it's less common.

Dan Austin: [1:55] We have a lot of single family homes and larger apartments, and then we're speckled with some duplexes here, and some six plexes here, and but we're, I would say for the most part, my town where I market has a lot of single families, and not as much small multifamily. But when you're talking about this discussion, there's a few things you wanna really look at and measure, one of them is going to be management, one of them will be return on your investment, and one of them really should be your growth strategy and where you're at in your overall investing set strategy. So diving into why you might wanna go small and pick these smaller buildings. Let's talk like duplex and quads and six plexes and stuff like that. The advantage of these are, they're much more liquid. You can sell a duplex, right, a lot faster than you can like a 48 unit or 60 unit apartment. The underwriting on it is simple, and the cool thing about it is, is there's a lot less sophisticated buyers buying small multi, and sellers selling small multi family. What you'll find it often in these markets, is they're either older, retiring landlords that just they bought these things thirty years ago, now they're ready to offload them, their P and L is on a piece of paper, and they collect their rent checks, literally through checks or cash, through a mailbox that's maybe on-site, this old school landlord that just is like, I wanna sell it, here's my price, take it or leave it. You also have some people that that got into it, know, some mom and pops that maybe aren't the old tired landlord, but they got into it and they didn't know what they're getting into and they just wanna offload it and sell it. Same thing goes on the buy side, is there's a lot of people that are hungry to learn how to house hack.

Dan Austin: [3:40] They want to move into one side and rent the other out, or they have some extra income, maybe they're they're a high income earning family and they heard real estate's great, so they they don't really have the grit and their w two job is paying them more than enough, so they don't wanna grind it out and do the hustle, but they're so they're willing to pay for some of that, but through a lower ROI. I'll give you an example, you know, in our market, we we can have like nicer duplexes, say it's three three bed, two baths side by side, you could easily, if it's nice, sell it for 800 to $900,000, each side maybe rents for 23, 2,400 on the high end. To a lot of the folks that are listening, that might not sound good, but to some, it sounds really good because they can go and park some money, and they can cash flow some a little bit, few $100, depending on how much they park, but they're gonna get the appreciation, the depreciation, and the the tax benefits essentially, and then just a place to park some money that's maybe diversifying out of the stock market. So at that level, you'll see that a lot more, which makes it easier to sell, easier to sell for a profit, and back to the sophistication of the buyers and sellers, it's easier to find these properties and get them at a discount. The other thing about them is that you can get when you're buying them, you're likely going to have a larger percent ownership, you're probably going to own a 100% of it, as opposed to some of these larger units where you may have to bring in limited partners, or other partners to joint venture it to buy them. Just because the dollar amounts are generally a little bit lower. I like to look at some of our our properties, Mike and I, a 100% own all of our properties, the biggest we've owned personally, is like an eight plex, which we actually just sold this year for a decent profit, and we have duplexes, and and six plexes, and single family homes, and for us, we own a 100% of it, know, fifty fifty for each of us, and we were able to get into these by buying them from less sophisticated sellers. I think about actually, now that I think about most of our multi family we bought was from baby boomer age people that wanted to sell, they didn't want they were just tired of dealing with tenants.

Dan Austin: [5:45] We had one guy that just wanted to move to Tucson, was the dead of the winter, he's like, I know it's worth more, but if you're really willing to do this, let's move it right now. We did that, we had some a duplex from an old guy that was house hacking it, that didn't wanna do it anymore. We bought one from an older gentleman, a duplex that he just didn't his wife was getting sick, he was in his eighties, he just didn't wanna deal with it, he wanted the cash in his bank account in case something happened. So we were able to go and help these people, because most of these properties we bought were, you know, disrepaired because they didn't take care of them for the last twenty years, and so they needed to be sold, you know, at a discount. So with that discount, we were able to come in, put some elbow grease in it, and scale to, you know, hundreds of thousands of dollars in equity in some of these properties, and it worked out well. And we're actually looking at, because our return on equity is so low in some of them, looking at exiting, and we're able we're able to exit, because they're nice properties, at a higher price point, than what we bought or another, you know, investor like us would pay for it, because there is such a glut of people looking to buy the small multis. The challenges with smaller buildings, or more of smaller buildings, is you got more roofs, you got more yards, more parking, and more tenant issues. A lot of times, especially if you're in like a c class or you know, b minus, you have not as quality tenants that are seeking out mom and pop landlords in smaller multi families, and you would typically maybe see where you have higher underwriting standard, credit standards, in like a 148 unit apartment building, where it's all commercialized, and so you either fit in the box or you don't. There's some of those tenants that don't fit in those box, seek out other mom and pop tenants that they can sometimes take advantage of. Not always, but sometimes.

Dan Austin: [7:22] But so the property management can be much more challenging. And you might find a great property manager you love, and they do really good for you, but then you you buy some more units on the other side of town, or in the town next door, and they Your property manager says, sure, I'd love to manage those. But that little bit of distance, that little bit of difference in neighborhoods and demographics makes it so that that is not as high quality, as what you were seeing with your other units, and you may have to go and seek it out and find new property managers, so now you have potentially multiple property managers managing your assets. So it just becomes a little bit harder, but I will say there is definitely opportunity for higher return on investment, and higher growth because of the reasons I listed, as far as it being a much more liquid asset that can be sold to a larger array of buyers. But it comes with problems, and scale is one of those problems, it's very hard, due to the property management issues, and also more roofs, more yards, more parking lots, more things that can happen, more exposure can happen when you're doing that, and you know, Mike and I, like I said, we have a portfolio of smaller assets, it's extremely hard to scale.

Dan Austin: [8:27] And sometimes I'm like, I should sell all of this and put it into a bigger property, one big property. There's some huge advantages, and so talking about why you might want to invest in these bigger buildings, and and we'll even say something around 20 units or bigger, we'll consider that bigger. You really what you're gonna do, if you get big enough, you're gonna have on-site management, so you're gonna have somebody on staff all the time, the building will pay for itself. The buildings, you're typically underwriting them to cover all those expenses that come with just the It's more of a business. You buy it with a business plan, an intended business plan, sellers are more sophisticated, so they're going to have hopefully better documentation, not all the time, but it's like, hey, you've got lawn care, you've got parking lot, plowing, you have all these things. Those things are kind of just standard and basic as compared to small multifamily, some owners like I have properties like, oh yeah, tenant in Unit 3, they plow their driveway when they're not drunk, right? And so it's like, that's not always the best from a management scale standpoint, where bigger buildings, you typically can have that built in. I will also say, like, it's just a more robust business opportunity, but it comes with it comes with some downsides, but I do like that there's usually one roof for you know, more units, less maintenance issues that can just spring up, because like I said, you're coming in with a more robust business plan, but the trade off with that is you're you're relinquishing some of your return on investment. Typically, again, going back to the more sophisticated buyers and sellers, they're not going to usually let their property get into disrepair to where the business plan is falling apart, typically, not always, and buyers are going to be expecting a deep discount, if you're not operating it very well, and those larger units are all based on cap rates, and so you know, whatever the market's doing, if you can squeeze a little bit more net operating income out by operating it more efficiently, it's going to boost the value, and that's what everybody's trying to do in the larger multi family game, it's like how do we increase, not just cash flow, but net operating income, by reducing expenses and increasing revenue.

Dan Austin: [10:34] That's what it's all about, that's the name of the game, and then selling at an opportunist point, where cap rates are compressing like what we saw the last several years when interest rates were zero. That really is the name of the game. Tough parts about these bigger buildings is typically you're gonna have less ownership, unless you have cash and you're able to come in and buy these, or you're able to buy the asset yourself, it's harder, you're less likely to just go and get a bridge loan and bury these things, because the more units you have, the longer it takes. It might be a three to five year stabilization period, right, before you can refinance and get money out. So a lot of folks, they raise capital, or they bring in joint venture partners who are all willing to split a piece of the deal, and then you're not tying up all of your capital, getting a really low return on investment, until that three to five year cash out refinance standpoint, or sale or exit, however you choose to to build out your business plan. And for a lot of folks, for me included, I've always kinda strayed away from that, because I kinda like owning a 100% of my assets, and getting a higher ROI, and putting sweat equity into things, bigger buildings, you still can do all that stuff, it's just less common and the deals are less less common to happen, where you know, if you go pull up Zillow, you can guarantee you're gonna go and find a bunch of duplexes, triplexes, six plexes bouncing around all over your market for sale, how many twenty, thirty, forty, hundred units are you gonna go see? Well, you're not gonna find them on Zillow, you're go look at Crexie or something like that, and they're gonna be just stupid wrong deals, right? You're not even able to see how how a deal like that would work. So they're fewer and far between, they rely much more on broker relationships to buy, so you might, if you're really pushing, be able to do one deal a year, where if you're doing like marketing direct to sellers, and looking for those tired landlords, those distressed sellers, you could buy several duplexes, several quads, know, you could throw in mean, for a while, Mike and I went on a buying spree, you know, buying a single family home here, buy a duplex next month, buy six plex next month, eight plex following month, right?

Dan Austin: [12:32] So we've definitely gone through those cycles, and one person might say, well yeah, but one bigger deal a year is better than a bunch of small deals. Absolutely, if that's your goal, but typically, I'll go back to the beginning of the conversation, putting sweat equity into these smaller buildings will typically have a higher ROI because of the the sellers on the one side, and the buyers on the other side of you. So really to to sum it up, there's not like a right or wrong answer, and I recommend people write out, what are your goals with real estate? Do you want it to be easy? Well, you're gonna have to probably give up some return on investment the easier you want it, and that's okay. There's nothing wrong with that. I love easy, that's what I said some days, I'm like, I think I might sell all of my single families and duplexes and stuff, and just go and reinvest in one large deal, and when that one large deal, I can squeeze out the ROI I want on that, go ahead and roll that in, ten thirty one that into another larger deal, and keep growing it that way, maybe look at some commercial assets, which I've been doing this year as well, because I'm at a point to where I want easy. If you're at a growth phase where you're willing to grind it out and and push more, more power is to you, go do it. And I'm not saying I'm done with that phase, I'm just right now putting that on pause, because I've done so much over the last, well, I don't know, eight years now. So it's definitely up to you, and what your goals are, but keep in mind, what are your growth goals?

Dan Austin: [13:51] What is your return on investment? When I say that, what are your cash on cash requirements? What is your IRR requirement, your internal rate of return, which is the time value of your return on money, not just how much you're earning, but when you're earning it, and look at the management piece, the time piece, and that will really help you determine which direction you wanna go, at least give you a starting point, because now you have a vision for what do you want it to look like, and then you can start running deals, deal analysis on things, and looking at these smaller multis versus the larger multifamily, and seeing what they come up with. So I will stop rambling on. If you have more questions, would love to chat about this. Hit me up on Instagram at investor man dan. DM me, does size matter? And I'll laugh. I think it'll be funny. But then I'll be happy to chat with you about this. Or if have questions on deals you're looking at, like, want my opinion on them, happy to take a look at them, I love the engagement, and also, if you have some opinions on this, let me know because I'm not saying that mine's the right opinion, if I glossed over somewhere and didn't talk about something just because I don't have all the time in the world to talk about it here, let me know. I'll be happy to to share more of that in a later episode as well, or out on like an Instagram reel or TikTok, so maybe I'll do a TikTok for you. But, with further ado, have a great weekend. I hope you enjoyed this episode, and see y'all next week.