Economies of Scale in Multi-Family Investing
I was recently asked the question if it would be better to own multiple apartment units across a certain town/city or would it be better to own one apartment complex with many units? The fast answer to that question is that it depends on the investment returns.
Apartments Across The City
For example sake, let’s assume that you have 20 doors in total, and those 20 doors are spread across the whole city. This city is approximately 40 min drive from one side to the other with most places taking about 20-30 min to get to. We also want to assume that you will not be managing the properties in either case (separate properties or one apartment complex).
Your property management company will end up charging around 6% of the rents collected to manage that apartment complex, and you also have to worry about gardening and pool services. Lets say that your gardener will charge you approximately $50/lawn/month, so your monthly bill would be around $1000. Your pool person will charge you $100/month, but you only have pools in 3 of your homes so your average bill will be $300/month. Now, lets assume that you also earn around $20,000/month on your total portfolio investment. If we take out $1300 for pool and gardening expenses, and then another $1200 for property management expenses, you are left with $17,500 at the end of the month to pay your mortgage, etc.
Because these properties are mostly single family you have no outside water or power bills to pay, but you do spend around $1000/month in repairs across all properties as well. After those expenses you are left with $16,500/month.
One Apartment Complex
Now let’s assume that all 20 of your doors are inside one apartment complex. You still have the same income of $20,000/month, and your property management company still charges 6%/month, which leaves you with $18,800/month. Your gardener comes to your complex and tells you that instead of the $1000/month that your bill has been he will be able to charge you $750/month for this apartment complex, and because you only have one pool in the apartment complex, your pool guy tells you that he is willing to do it for only $150/month. That leaves you with $17,900/month after those expenses.
You now have an apartment complex that requires lighting and water bills to be paid, and those two expenses together cost you around $600/month. This brings your total income down to $17,300/month. Also, because the apartment complex is 15 units or larger, there will need to be an onsite manager for this multi family property which will cost around $2000/month and bring your expenses down to $15,300/month. Finally, you have maintenance repairs on that property that generally will run around $1000/month but because you were able to get an onsite property manager who does maintenance as well, he was able to bring that cost down to $700/month which brings down your final income to $14,600/month.
What Is More Important To You?
As a real estate investor, and not having to manage your own properties, to you the most important thing is return. Given the two examples below you would end up with a lower return by owning the larger multi family complex, than you would with owning multiple different multi family properties. Therefore, you would have to run the numbers on each scenario to make sure that your return would be better by owning one big multi family complex versus by purchasing many smaller multi family units. This is an analysis that we can help our investors with, as well.
From my point of view, I think that the real estate investor who is looking to trade into a larger multi family complex just because of the ‘ease’ of property management is doing it for the wrong reasons, especially if you have your properties managed by a third party property management company. If you are not having to manage the properties and deal with the headaches of Tenants and repairs, then what does it matter to you if the property management company has to drive around town a little more. That is expense that they have to incur.
From the property management point of view, we would rather manage one apartment complex because of the ease of use, versus having to drive around to 20 different properties, but because we get paid either way to manage the multi family properties we will take them on. Especially because we are trying to grow to be a property management company that has many thousands of apartments or multi family units versus just having a few hundred.
If you have any questions, please feel free to reach out to me and I can always give my advice.
Until Next Time,