Last week, some partners and I closed on a 42-unit property in Daytona Beach, FL. This deal puts our company over 350 units, and I wanted to share some things I’ve learned while we’ve grown the business.
Full disclosure – I hate unit counts. I think people can misrepresent their experience and the size of their business (owning 1% of 1,000 units doesn’t really mean anything, while owning 20 units free and clear in an expensive market means quite a lot). That said, I own about 100 units personally and am a partner/equity holder of varying sizes in the other 250 units.
Anyways, what I've learned:
- The ability to consistently find great deals is the most important skill set any investor can have. If you can’t consistently find great deals, scaling your business becomes significantly more challenging. If you can consistently take down deals where you’re all in (purchase, reno, holding, costs) at 75-80% of stabilized value, the property becomes “free” once you refinance (no money in it). If you can’t do deals like this consistently, your money becomes tied up. Velocity of capital is critical!
- Similar to point #1, you need to focus on equity, not cash flow. Yes, cash flow matters in the sense that it keeps you in the game, allows you to pay your debt, and provides a margin of safety, but the real $$ is made in equity growth/creating value. If you bought a 20-unit apartment building, with a market value of $2M, that nets $150/mo/unit after debt service, you’ll make $36,000/year from cash flow. Now let’s say you bought that property for $1.8M (just 10% below market value, creating $200k in equity immediately) and its value increases 10% this year (you organically raise rents, perform a value-add, etc) to $2.2M – you’ve created $400k in equity. Even if rents were to rise over time, it would take almost 8-10+ years to earn that from cash flow. Keep this in mind when selecting markets, asset types, etc. There is wayyyyy less money to be made in extremely low-priced markets with less promising long-term growth potential, considering the real $$ is made from natural/forced appreciation.
- The investors who scale their businesses quickly outsource almost everything… they don’t source their own debt (hire mortgage brokers), don’t manage their own properties (hire property managers or build a team internally), don’t sell their own deals (hire brokers), don’t do their own construction (hire contractors), don’t manage their own books (hire bookkeepers), don’t draft any of their own legal docs (hire attorneys), etc, etc, etc. They realize the only tasks that truly matter are finding deals, finding money, and asset managing effectively – they hire pros to do everything else.
- Cash is critical – while doing deals with minimal cash is the goal, you need to have access to cash at all times. Many investors find themselves in a position where they’re asset rich and cash poor (not good)! Cash is the gasoline to an investor’s car… without it, everything grinds to a halt. It doesn’t matter if a property is cash flowing, there will be months where things go wrong, and you need to feed the beast. We currently hold a minimum of $2,500/unit in reserves and are working to increase this as rates rise and the market softens. This directly contradicts the “cash is trash” crowd that is hellbent on minimizing the cash sitting in their bank account – don’t be this person.
- It's important to constantly be tracking your ROE (return on equity) in assets as you do more deals. If the value of a property you own has increased significantly, but its yield/cash flow hasn't, it might make sense to sell or refinance. We've been selling a large # of properties in the last 1-2 years to access our equity (invest in larger buildings that generate more cash flow, invest at the business level, build cash reserves, etc).
- Understand how to creatively structure deals, whether it’s using investor capital, private money, seller financing, seller credits, second mortgages, etc. This is an entire topic in itself, however, if you bring less of your own cash to deals, you’ll do more deals (the goal)! If the only tool in your tool belt is putting 20-25% cash down to acquire assets, it’s going to take you a while to gain momentum.
- Paying for education and networking have been the highest return investments I’ve ever made in business/real estate. I know paying to get ahead is a “taboo” subject on BP, however, my business exploded once I began investing in networking, masterminds, and courses which develop critical skills. Yes, you can probably learn everything for free... that said, it’ll just take you much longer, and you’ll make more mistakes along the way. In general, investing at the business level (marketing, prospecting, hiring, software, masterminds, etc) will drive growth more than solely investing in physical real estate.
That said, lessons/advice is not "one size fits all". These comments are meant to speak to the investors out there who are looking to create a business out of real estate and scale – if your goal is to buy a property a year for the next 5-10 years, then maybe some of this doesn’t apply. I’d be interested in hearing what other investors have learned as they have grown their business, please comment below!
