So, I want 100-200 SFD & 2-4 unit rentals. What's the issue?

Buying & Selling Real Estate
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So, I want 100-200 SFD & 2-4 unit rentals. What's the issue?

Brandon Schlichter
Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes

So, for the past 3 years or so I've been mentioning to a FEW established investors that I'd like to have at LEAST 100 SFD & 2-4 unit rentals before I consider buying an apartment complex, commercial, etc.  The goal being to have 200 before I start really doing commercial on a serious basis.

When I mention this, the response is usually "You don't want that many, you should stop at 30-40 units, convert them to Commercial or a large apartment complex" usually due to management & cashflow issues.

So, as of this time I'm right at 67 rentals with another 4 in contract. Looking at a few more purchases this year that might put me to the 75-80 rental range.

And at this point I'm trying to figure out - What's the problem with SFD & 2-4 units?

As of today I manage it all myself. I do utilize work crews for all my maintenance work (Because regardless of what I do, I'll never be able to scale without outsourcing at least this). I could see myself easily keeping it all a one-man-show at 150 units before I have to consider management as long as my workload scales linearly. My expectation after I bought my first rental was that my workload would scale in a linear fashion, and more-or-less it has. As time goes on I keep getting more efficient at how I manage it all. By tracking expenses with QuickBooks, I've been able to find where I was leaking cash (Mostly dealing with how I managed tenant utilities) but also decrease my hours spent per rental, per month. 

So, for those more experienced, what am I missing? I realize that taking on someone to help manage at 150 units will mean employment taxes, training, and a increased workload most likely at a somewhat lower cashflow per unit due to the increased expenses, but it would let me scale beyond the 150 unit threshold to whatever I deem useful. This is what I'd LIKE to do, seeing as I'm 31 years old and there just seems to be too few people wanting to 'do the landlord thing' and constantly buy property. Most of the people that were hot on buying 3,4,5 years ago have slowed down significantly as prices have gone up, but I've been able to increase my speed of purchasing due to a larger sphere of influence and organic marketing. 

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Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Brandon Schlichter I think it’s just a matter of complexity. 100 units in a single complex is just a different ball of wax that 100 SFRs. You have less roofing-per-unit, exterior maintenance per unit, etc. so there are some cap-ex implications. But you also get the lovely privilege (in most cases) of paying the water bill. I think the biggest advantage that you *might* want to consider is that you can force appreciation in non-appreciation markets. If the “dirt” doesn’t increase in value but you raise rents $5 per month with a 100-unit complex you bump your gross rents by $6K per year. It’s a rounding error when it comes to revenue but it increases the NOI so you can get force some appreciation due to that. And, just logistically, it’s easier to drive by a 100-unit complex than it is 100 SFRs.
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  • Troy Luster
    Investor · Atlanta, GA · Member since 2017 · 136 posts · 54 votes
    9y

    How much do you plan to pay that person that manages 150 units?  And have you considered a property management company as a transition?  My thoughts are that it will be hard to find someone skilled at  reasonable pay.  You may have to bring in someone that is just a go-getter period and train them.  I just don't see someone coming in being as dedicated and diligent as you, especially on a salary.

    1Reply
  • Brandon Schlichter
    OP
    Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
    9y

    Not a single management company I can trust in my area, might as well just make my own. I'm bringing in enough money to build one, could even subsidize all the employees through outside management. But if I keep growing there's no need for outside property 

    1Reply
  • Troy Luster
    Investor · Atlanta, GA · Member since 2017 · 136 posts · 54 votes
    9y

    I'd start training someone now.  You'll want to put them through a rigorous process so the faint of heart will quit.  Great problem to have though.

    1Reply
  • Jarrod Kohl
    Boston, MA · Member since 2017 · 209 posts · 126 votes
    9y

    If you do not like any of the property management companies in your area, you may be best off just hiring a maintenance/bookkeeper/assistant whatever makes sense. 

    I would also look into dedicated property management software. Buildium, Appfolio and Rentmanager are all pretty great and aside from the time it will take to set everything up, it would end up saving you some time and hassle.

    Most people recommend moving to multifamily, because it makes sense at a certain dollar amount.  Every market is different, but the idea is that you only have 2 or 3 roofs a few heating systems and one location to drive to, not 100 different roofs, water heaters, etc. There are also ways to force appreciation into a multifamily building that can increase market value and in theory if you needed to liquidate, it would be way easier to sell a few buildings than to sell 100. Again, not saying that you need to do multifamily but I personally like to have a mix of both. 

    2Reply
  • Brandon Schlichter
    OP
    Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
    9y

    We just got appfolio and are in the final stages of setting it up.

    I already have a maintenance guy onhand (And have since day #1). As I get more I'm planning on assistants and book keepers for when my automation isn't enough.

    Cap rates on larger multi-families around here are around 7%, cap rates on SFD and Duplexes are near 20%. That's a pretty dramatic spread, especially if you look at large multi-family only appreciating 1-2% and SFDs (Not so much duplexes) getting a solid 5%-6% a year for the past 3-4 years. 

    2Reply
  • Christine Kankowski
    Real Estate Broker · Temecula, CA · Member since 2014 · 992 posts · 782 votes
    9y

    Sounds like you have your ducks in a row.   Good job getting Appfolio.  THis will help keep things organized especially when you hire someone.  Applications, leases, maintenance requests are all there at the touch of a button, along with rent collection,

    Good for you!

    1Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Brandon Schlichter I think it’s just a matter of complexity. 100 units in a single complex is just a different ball of wax that 100 SFRs. You have less roofing-per-unit, exterior maintenance per unit, etc. so there are some cap-ex implications. But you also get the lovely privilege (in most cases) of paying the water bill. I think the biggest advantage that you *might* want to consider is that you can force appreciation in non-appreciation markets. If the “dirt” doesn’t increase in value but you raise rents $5 per month with a 100-unit complex you bump your gross rents by $6K per year. It’s a rounding error when it comes to revenue but it increases the NOI so you can get force some appreciation due to that. And, just logistically, it’s easier to drive by a 100-unit complex than it is 100 SFRs.
    4Reply
  • Henry Perez
    Rental Property Investor · Redwood City, CA · Member since 2017 · 50 posts · 22 votes
    9y

    @Brandon Schlichter Keep rocking it Brandon!

    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    9y

    There's nothing wrong with it, in fact that's what we do. You just have to either find or create a really good offsite management team. Lots of small properties and a few big properties are just different strategies. Done right, both can be very lucrative.

    Podcast Guest on Show #121
    3Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    Lots of ways to make money in real estate...both are great strategies. It just comes down to market opportunity and personal preference. Many CRE investors don't care to be landlords and they like the efficiency of larger properties (on-site staff, professional team (management, lenders, brokers, vendors), inexpensive vendor specialists (flooring, paint, HVAC, other trades), single location, cost segregation).

    2Reply
  • Brandon Schlichter
    OP
    Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
    9y

    @Andrew Syrios Thanks for the input.

    I'm not saying that large multi-families are a bad strategy (Obviously they're good for availability). More than anything I'm trying to figure out what the roadblocks will be at 100-150 units compared to what I see at 71 units. 

    1Reply
  • Thomas Williamson
    Investor · atlanta , GA · Member since 2012 · 287 posts · 148 votes
    9y

    @Brandon Schlichter Wow! impressive.  I'm more interested in how did you get to so many sf units?  When did you start, how long did it take you, how are you financing, what's the average price of your properties you're buying, cost of rehab?

    I ask all that because I'm super impressed with your progress!  I've been at this since 2010 and feel stuck at the moment.  Would love to hear more about your story if you don't mind sharing!  Thanks

    1Reply
  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    9y

    @Brandon Schlichter

    I like a lot of what you are doing. Specifically, I like that even though you aren't going large multi-family, you are scaling up to a large number of units. I also like that you have your goals set on at least tripling that number.

    I do strongly believe that you need to have employees. If you are the piece holding everything together, it could be a nightmare if you were to get sick or injured. Also I think it would give you time to expand.

    Podcast Guest on Show #21
    2Reply
  • Brandon Schlichter
    OP
    Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
    9y
    Originally posted by @Thomas Williamson:

    @Brandon Schlichter Wow! impressive.  I'm more interested in how did you get to so many sf units?  When did you start, how long did it take you, how are you financing, what's the average price of your properties you're buying, cost of rehab?

    I ask all that because I'm super impressed with your progress!  I've been at this since 2010 and feel stuck at the moment.  Would love to hear more about your story if you don't mind sharing!  Thanks

    Just a natural result of growth and targeting properties I like. Early on I mostly bought foreclosures off the MLS, anymore it's all SOI and facebook (Not getting facebook ads, just people contacting me personally or my business page on there).

    I started this phase in 2013, mostly financing via private lenders/partnerships with SOME bank money in there. 

    $18K or so per UNIT on my non-SFD, my SFDs run about $25k purchase with $7.5k in rehab per house, apartment units are around $5k/each.

    2Reply
  • Owen DashnerPro Member
    Lender · Omaha, NE · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    @Brandon Schlichter, I don't believe anyone has mentioned exit strategy as a consideration. If/when you get to the point of selling, trying to sell off 200 SFR's could be much more cumbersome than selling a small amount of multifamily properties.

    You will also have to manage 200 different insurance policies and likely way more loans, the locations are going to be much more spread out, and you have little control over the market value of your property. With commercial multifamily, you are able to increase the value of the property exponentially by increasing NOI. With houses, they are worth exactly what the neighboring comparable houses are worth (give or take), even if you put in super nice finishes.

    There is no right or wrong to what you are doing, it's just that a large SFR portfolio is more inefficient to manage. I have about the same number of units you do and started with SFR, and still have a couple dozen. But after owning both for a few years, I see the efficiencies and ability to scale much faster with multifamily. It takes the same amount of work to buy a 20 unit building that it does to buy one house. You know full well how much work it takes to find and buy 20 houses that make sense as an investment...

    But that's just my opinion, it's not like a portfolio of your size is anything to sneeze at, you are doing great.

    4Reply
  • Brandon Schlichter
    OP
    Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
    9y

    I've got about 20 solid properties that make sense as investments, finding properties has never been the problem for me, the problem has been having funding to buy them.

    I've considered the issue with selling properties however from what I see large multi-families are almost exclusively in the realm of hedge funds and out-of-state buyers. Smaller properties sell to locals. While selling 200 at one time wouldn't be possible (And would likely crash the market), they could be sold off a few a month (Granted taking forever to sell. The ALTERNATIVE is that if I make an efficient company, with managers in place I could potentially just package things up and sell them as turnkey investments. If ROI yields are double what one would see as compared to large multi-families, I would THINK they would be quite sell-able and not effect the market as a whole.

    2Reply
  • Jarrod Kohl
    Boston, MA · Member since 2017 · 209 posts · 126 votes
    9y
    Originally posted by @Brandon Schlichter:

    I've got about 20 solid properties that make sense as investments, finding properties has never been the problem for me, the problem has been having funding to buy them.

    I've considered the issue with selling properties however from what I see large multi-families are almost exclusively in the realm of hedge funds and out-of-state buyers. Smaller properties sell to locals. While selling 200 at one time wouldn't be possible (And would likely crash the market), they could be sold off a few a month (Granted taking forever to sell. The ALTERNATIVE is that if I make an efficient company, with managers in place I could potentially just package things up and sell them as turnkey investments. If ROI yields are double what one would see as compared to large multi-families, I would THINK they would be quite sell-able and not effect the market as a whole.

     You could certainly sell them as a whole (or at least a large chunk) we did this to acquire a large (mostly) student housing portfolio in Ohio.

    0Reply
  • Irina Belkofer
    Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes
    9y

    @Brandon Schlichter you're doing great!

    You don't have to sell your SFR at all - you can lease option them slowly and no need for an agent even.

    Managing 100 SFR might be slightly more complicated but your ROI 20% vs 7% MFs not even close to consider that.

    The only good news is that financing MF is easier because banks would estimate collateral first and foremost unlike in case of SFRs - so returns will be lower but it will let you fund more units than with SFR

    Once you get your own management team on the board, you can think through different strategies for asquaring more properties, 1031 exchange etc. Your SFR won't have any trouble to sell: to your own tenant without even showing in the market. All that equity you can use for buying more properties which are easier to manage.

    Great job! 

    1Reply
  • Kay Kay Singh
    Rental Property Investor · Fort Wayne, IN · Member since 2016 · 258 posts · 177 votes
    9y
    Brandon Schlichter Good job and I am a landlord by accident and I bought 35 SFRs in one shot two years ago and bought 7 more recently and I also manage them myself and have plenty of time . But I think there should be a mix of SFRs and multifamily because you can have a good cash flow with your SFRs and can build wealth with multifamily.One more suggestion use PDFfiller for your leases , notices and evictions. A very good tool for landlords.
    1Reply
  • Brandon Schlichter
    OP
    Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
    9y

    One thing I consider is this : 

    20% NOI on a $5mm investment = $1mm/yr

    7% NOI on $5mm investment = $350k/yr

    The $650k difference would be more than enough to justify hiring management, work, etc. I realize capex/maintenance would be higher, likely higher turnover if you're buying dumpier properties, etc. But still if you take it down to only 15% true NOI, it's still a difference of $400k.

    3Reply
  • Account Closed
    Consultant · Phoenix, AZ · Member since 2017 · 152 posts · 23 votes
    9y
    What's the problem? I don't see one.
    0Reply
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