Can you have too few rental properties?

[Tim Pommett]

I'm a newbie, and recently attended my local DFW Real Estate Investment club this Saturday. I heard this interesting idea about a buy and hold philosophy in relation to vacancy:

Most investors don't own enough properties. In fact, your goal should be to own at least 20 properties. Even further, the most dangerous time in an investor's career is when they own about 5 properties.

Obviously the exact numbers can be argued, but I agree with the logic. Once you own 5, you are at the risk of multiple properties going vacant, which could be devastating. Once you have about 20 properties, the vacancy rate among your portfolio of investments flattens out. Basically it's the same idea as diversifying you stock portfolio.

Any thoughts on this? It was one of my bigger take aways from this last meeting, definitely stuck with me for some reason

[Josh Sterling]

In one of John T Reed's books he talks about how a person can manage 30 or so units on their own, maybe up to 40 if they are superman, but after that it becomes overwhelming and they need to put systems in place and have other people take over some of the workload.

I agree with what @Marcia Maynard said above. Depending on the way you manage, somewhere between 10-20 units becomes difficult. You are too small to hire someone and too big to handle everything yourself.

My experience was as follows:

1-4 units: Anxious that rents wouldn't be paid and no major issues would come up. Any unplanned vacancy or unforeseen maintenance issue could be all of the cash flow for several months. All work completed myself

5-15 units: Less worried about unforeseen issues occurring. Started to develop and understand the systems and act more like a business. Ex. If someone couldn't pay rent, they get a 7-day notice. If they have to be evicted, it is only 10% or so of scheduled gross income. If something breaks it is still only a small percentage of overall income. While some problems seemed to occur in groups, it was still easier to manage because there was always a significant portion of the business running normally. Started to hire out handyman and rehab work.

15-30 units: Systems are in place. The worries and anxiety are less, but the workload has increased significantly. While I don't like it when there is a vacancy, turnover, or maintenance issue, I understand that it is just part of the business and go on with life. A call comes in, I dispatch it to the appropriate team member (handyman, plumber, electrician, accountant, lawyer) and pay for services when billed. There is also the benefit that I use the same tradesmen regularly and start to get preferential treatment. Also switched to property management software. I no longer do any maintenance work at all, just answer phones, do showings, manage contractors/tenants. But the bottleneck in the system is starting to become apparent. It is me.

30-50 units: It is obvious that I should to hire a person to take over the day to day operations. Not because it is a ridiculous amount of work, but because I have to be there everyday. Someone to answer the phones and direct calls to the appropriate tradesmen, someone to do showings, someone to do bookkeeping. The problem is that a full time employee would take a large percentage of the cash flow, the calls and showings are sporadic but last longer than the standard 9-5, and it still doesn't seem like enough work to have someone sitting in the office all day long. Feels like I am stuck again. The true test of a successful business is one where the owner could go away for a month and come back to the same operation he left. This would not be the case for me. Seems like the only option is to grow.

This is where I am today. (btw I still work a full time job)

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The plan is to grow the number of units, possibly by starting a property management company, and also by continuing to purchase for myself. I believe that if we can get to 120-150 units under management we will be able to justify a staff of 2-3 full time people and free myself up.

I'm sure there are other issues that will come up at that size and larger. I would love to hear the experience of anyone who is at that point.

Long post I know but that is my real life experience. I hope it helps you.