Success in "smaller" unit count multifamily?

Question

Hey guys!!Would love to hear opinions on this topic from those with experience in multifamily investments. As I've spoken to many investors in regards to the size of multifamily one should pursue, I keep running into the following sentiment, from both smaller individual investors to larger syndicators alike: it is not worth it to pursue multifamily investments under [let's call it] 75-ish units that allow you to make sense of on-site property management and other economies of scale.

Of course, this generalizes to a large degree, as well as takes a subjective stance as to what "success" is, and also makes assumptions regarding investors' personal preferences on how they want to run their investment, what they're willing to tolerate, and what they're looking to accomplish. Assuming the aim is to not self-manage as an owner and have third party management in place and be as "passive" as possible, how realistic is it to be in the 20, 30, 40, 50ish unit range without investing yourself into a job or a headache? It would be ludicrous to think that it is impossible to do well in the space of smaller-unit-count apartments, but does it require significantly more hassle than if you simply went "big" from the get-go? From conversations with large experienced syndicators who started "small" and progressed the multiple-hundred-unit apartments, to individual investors that currently own on the smaller end, it has been my experience that they say it's not worth it to start "small."

To be clear, I'm not saying what I've heard is always the case- I'm just curious given that it's a sticking point that has repeated itself many times over when talking to experience investors and I'm looking to hear from those who manage/have managed smaller or larger multifamily and can speak from personal experience to the validity of such a view.

Would love to hear thoughts, push-back, personal experiences, etc! :)

Cheers

Jill F. · Answer

@Alain Perez-Majul I calculated that I would need a minimum of 65 units leveraged at most 75% in order to pay for a w-2 manager to support my fairly modest lifestyle. That could only happen with robust business processes in place and I would still need to manage the manager. However, it turns out that I actually enjoy managing our properties and plan to continue doing so for the foreseeable future. We have diy renovated a sizeable number of our units to keep costs low and force appreciation in order to strech our dollars available for purchases. If we complete the deal we are working on now, and finish the renovations we have in progress, we will have 59 units and we should be able to start paying others to do most of the renovations, and I will be happy to do that!

Rick Martin · Answer

@Alain Perez-MajulPeople have purchased 20 -50 unit buildings and have made the numbers work. Logistics plays a significant role. You may be lucky enough to find a professional 3rd party operator, who happens to have larger properties down the street, so they may be willing to take on smaller properties due to proximity efficiencies. There are smaller property mgt companies that will run a hybrid of single and multifamily. The problem here is that they may charge a minimum of 8 - 10%, which is high relative to larger commercial properties (around 3%), and you will still have to cover maintenance + leasing + the burden. If you had a 20 unit and if you had your leasing and maintenance at 20 hours a week at $20/hr (wage + burden), you figure 20/week x 52 weeks/year) X $20 = $20,800 a year for payroll on top of the 8% mgt fee. Ouch. A rule of thumb for larger commercial MF payroll is about $1000/door - so not too far off for your 20 unit. 20 units X $1000. Again though, their mgt fee is closer to 3%. We have looked to JV out of state smaller deals, and usually get outbid by locals who are willing to self-manage and even self-contract.

Erik W. · Answer

@Alain Perez-Majul, hi ...love the topic.  It's one I'm pondering right now as I'm trying to get into MF, but debating just how big.

Regardless of one's opinion on big vs. small, the fact is that you need probably AT LEAST $35,000+ year you can dedicate for salary to hire a full-time manager of any quality and probably $35,000 - $40,000 for a "handyman / maintenance" person if you don't want to be involved in the day to day.  This is true for my Mid-Western town where median household income is $45,000-$50,000.  That's just salary too.  Factor in benefits, employer-paid things like workman's comp, tools, office equipment, and employer's share of social security, and let's budget for at least $100,000/year for those two people to work for you full-time, or else you're not going to get quality employees.

To generate that level of income, I'd need around 150 units in a stabilized complex renting units for $700+/month.

That said...could you hire someone part-time?  That's what I'm contemplating right now.  I have other SFH and "plex" rental units, and in any given year I pay my current contractors around $30,000 - $40,000 / year in labor depending on how much work they do.  If I added a small apartment complex (50 units?) to my existing portfolio, that would cover most if not all of a full time maintenance man's salary.  A little less efficient than having all my units in one location, but still doable.

For a manager: maybe hire a talented person who just wants a part-time gig at 20-25 hours per week and have apartment "office" hours of maybe 9:30-2:30 Monday, Wednesday, Friday and Saturday 9 - 11.  Or I could have a tenant/manager who gets free rent and a modest salary that's "on duty" 8 - 5 pm, but has no other responsibilities beyond showing units, taking applications, and keeping an eye on the place.

Too, technology can take care of some manager duties.

* I require all tenants to pay via auto-debit / ACH.

* Applicants fill out their paperwork themselves online, and the 3rd party processing company pulls the credit report.

* I post virtual tours of my houses on YouTube walking thru the unit very slowly with my phone taking video.  Plus I take 50+ pictures.

* Lease signing via DocuSign.  Have residents sign a move-in property condition document that way too, but they have to provide you video and/or camera images of any deficiencies they don't want to be charged for.

* Use a lockbox to do in-person tours.

Another option is you could hire a full-service PM company and negotiate a bulk discount for 50 units.  It's much easier for them to post pictures of 1 "model" unit vs. 50 houses, and they only have to send you one monthly statement vs. keep up with 25-50 owners that each have 1-2 units.

Bottom line: depending on what you want to do, you could still be 100% passive with a smaller complex.  I hope these ideas help get your creative juices flowing.

Another angle is exit strategy: to whom are you going to sell?  Institutional owners want the cut and dry, 150+ units that are self-sustaining with a dedicated staff.  Mom 'n Pop Investors would probably be more your target with the smaller apartment buildings.

Craig Sloan · Answer

I think the real issue for a lot of people is the capital to get started.  I had to start with very small (duplex, triplex, fourplex) to get started and then work my way up to 20-35 unit properties.  I'd like to make the move into larger properties now (100+ units but prices are so high).  I think you can get where you want starting small it will just take you longer.  If capital isn't an issue I'd say starting bigger is better but I don't know that that is a realistic approach for most investors.

Enrique Huerta · Answer

I hate to burst your bubble, but if you're making a direct investment into real estate of any size, don't expect it to be 100% passive. You will still need to coach your management staff, review financials, visit the site, and step in when the manager is not performing to your expectations. With that said, the only passive investment is where you invest as an LP with an experienced investment manager.

There is levels of passivity and I believe that the best way to be truly passive is to be an LP. The next best thing is larger communities for all the reasons that @Erik Whiting pointed out. He makes a valid point. If you buy smaller assets or take a hybrid approach like Erik is considering, it will be slightly more passive but you still have to work!

The smaller the asset, the more involved you will have to be UNLESS you give up more income. As an example, a property manager for a house typically charges 7%-10% of the income. This applies up to about 15 units. Beyond that it might go to 5%-6% up to 50 units. Beyond 50U it might go to 4% and then over 100 it is typically 3% or less...There are general fees and only account for the management, not for the payroll and other expenses mentioned.

Only true 150+ unit assets can support a full staff and being as passive as possible...

This is my answer given your objective: "Assuming the aim is to not self-manage as an owner and have third party management in place and be as "passive" as possible, how realistic is it to be in the 20, 30, 40, 50ish unit range without investing yourself into a job or a headache? It would be ludicrous to think that it is impossible to do well in the space of smaller-unit-count apartments, but does it require significantly more hassle than if you simply went "big" from the get-go?"

Lee Yoder · Answer

@Christopher B.  Yes, the equity was split based on how much capital each investor provided for the purchase and rehab costs. I have 50% in all the deals for finding the deal, managing the extensive rehab (and completing a lot of work myself), managing the PM and managing the asset. The investors bring the money and get the other 50%.

Christopher B. · Answer

Did you split your equity and capital improvement budget (if any) among your friend/family investors?

Lee Yoder · Answer

@Alain Perez-Majul  This is all I've been thinking about lately and I've really enjoyed reading through all of these great responses. I currently own 16 unit, 10 unit and 8 unit properties. I have them all professionally managed and have since day 1 (I purchased all of these properties last fall). I've been pretty happy with the PM, but not thrilled. They have not been very quick to fill vacant units. Their maintenance costs have been very reasonable and they've done a lot of work for me. These properties are very profitable and I purchased them with just one or two friends/family each. We own them in LLC's and only have to split any profit from cash flow, or from a refinance/sale, with 2-3 people.

I really want to take the next step with buying 100+ unit properties for all the reason mentioned above. But, syndicating definitely has some negatives that buying small properties with family/friends does not. Obviously, there is much more regulation. You also have to deal with many more investors. These investors will likely be more educated and have higher expectations. The biggest negative for me at this time though is the prices due to increased competition. I bought these smaller MF properties for much less per unit and a much higher cap rate than I could ever have dreamed of buying a 100+ unit property. I'm really hoping this changes soon as I believe the Covid shutdown is going to take us into a bad recession and serious correction in all asset classes.

Evan Polaski · Answer

@Alain Perez-Majul  of course it is possible, people do it all the time.  But as noted there are a few downsides.

You likely will find a professional level management company to manage these at a 3% rate, as you would get on much larger properties.  Additionally, they will charge hourly for the management team (leasing and maintenance), so you net management expense will be higher than "typical".

You also can lose based on focus.  Since your property is not only a very small piece of the management portfolio, but also because you are essentially hiring part-time hourly workers to handle everything.  Just like with larger assets, you will likely have your maintenance guy handling 150 or so units, but because you are only say 1/2 to 1/3 of it, they won't always be there when you need them.  Same with leasing staff, you will not benefit from "drop in" leasing since you won't have someone manning a desk 100% of the time.

Success is clearly achievable at with smaller unit counts.  The hard part, I think is that you are still a bit in the area of self-managed folks that will value the asset much higher because they don't account for their own time.  Where I see people being very successful here is the in the long view with a focus on building a portfolio that can achieve economies of scale.  If you own 5 - 50 unit properties all in the same city, you can likely create your own team, or hire a professional management company and allocate a full-time. salaried leasing and maintenance person that is only working on your portfolio, thereby achieving some savings versus hourly workers.

Alain Perez-Majul · Answer

@Jill F. awesome, that's great feedback! It's good to hear your experience as you're in that space. I don't think I would mind managing the manager, just wouldn't want to be the manager overseeing the day-to-day operations myself; so something like this would be feasible for me. Happy to hear you're making it work! Good luck on the current deal :)

Success in "smaller" unit count multifamily?

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