Start small, or START BIG?

Question

Hello BP!

I have a question for you all. I am conflicted at the moment as I am starting out in the investing world. I have heard pros and cons from both sides of the fence on the topic of: starting small and working your way up / snowballing to bigger deals OR creatively starting in bigger deals from the get-go because there can be less risk (still risk, just less in my opinion). I am an avid fan of Grant Cardone, and one of his rules is to go no smaller than 16 units (what do you think about this rule?). I understand that with that there is less risk for vacancy loss and the property has potential to produce more income creating more wiggle room for unexpected issues. On the flip-side, I know that you need more capital when dealing with larger properties and that is where the creativity would come in. BUT I have also heard many success stories with people in SFH and it can require less capital. You can flip to get quick cash to then use on larger deals. Dealing with SFH can be dicey because there is more emotion involved, where as dealing with commercial, the properties are assessed on how much income they produce. I know I am rambling, but could you share with me your opinion on the subject? How did you get started? What did you do right, what did you do wrong? What do you wish you would have done when you were in your early 20's?

Thank you for reading my forum post and thank you for your response!

James Galla · Answer

I think Grant Cardone is just another person that falls in the scammy guru category, so you ought to take whatever he says with a grain of salt. For instance, his 16-unit rule is absurd. Honestly, it sounds like MLM talk where you get the nice big presentation about how you're going to be a rich real estate investor right off the bat with complete disregard for the listener's actual capability to responsibly undertake such large commitments.

The notion that larger units are less risky than smaller units is flat wrong. Unless you have some kind of massive access to capital, you're going to be automatically overleveraged, exposed to significant risk of liability, and subject to a substantially higher degree of sophistication in your dealings. Moreover, you are not spreading the risk over several units - you would be dumping all your eggs in one basket. Even the method by which you acquire the capital to make a purchase of a large unit may likely be subject to securities regulation. There are many more issues that larger purchases have that smaller purchases don't.

Turning to the residential vs. commercial level of emotion - that depends on who owns the property. Perhaps you have a mom and pop ice-cream shop in your commercial unit such that you get emotional when they realize their business idea was a flop in the winter time and you're forced to evict them on their 5-year-lease. And, I wouldn't say its just about how much income they produce. With residential units, you keep track of your capital expenditures, neighborhood data, the credit score of the tenant, criminal history, etc., but with commercial units, you need to keep track of both capital expenditures and the financial viability of the business leasing the unit. That turns on whether you know how to evaluate a business. This means you need to understand the industry standards for the business when reviewing profit and loss statements, balance sheet, statement of operations, tax returns, etc. Naturally, there is always the chance that you don't need to know anything and could just get lucky.

Start small, or START BIG?

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