Why I like 1-20 units
If an established investor replayed their journey, they’d see a copious amount of time was spent on things that didn’t matter.
You could argue that this was the right approach to make progress as opposed to the usual analysis paralysis rookie investors default to—that incurring waste is part of the game.
In my experience that is not true.
You can identify when you took the wrong turns—in real-time as it’s happening. But only if you are intentional about your goals and the strategy you want to take there.
Without a strategy, you have no frame of reference to know when you have swayed.
There is a term called vanity metric in the tech and the startup world that applies perfectly here.
For example, how many videos are watched on Youtube is a vanity metric if the user is only watching a couple of mins per video. The more rewarding metric is how many hours are watched per user.
Show me any disruptive company and I’ll show you a deliberate and methodical long game strategy and focus on the right metric.
But it’s 2022!
Everyone is swinging big with bigger multifamilies. Even 20-yr-olds are buying 100 units at once.
It’s almost unthinkable to spot a wrong turn.
Investors are riding the bull run influenced by the survivorship bias of non-stop success stories on Biggerpockets et al.
Generic advice is “Build the systems and oil them well, and profits are assured”.
A common misconception for many is Real Estate does not need an elaborate strategy because it is operation-heavy and the focus needs to be on systems.
When in reality systems are a requirement, not a competitive advantage. The automation system is not going to bubblewrap your portfolio when market forces are throwing it around.
And if you are finding yourself in reaction mode, it’s already too late.
The vanity metric in this case is the number of units when the more rewarding metric is return per unit and the speed with which you can maximize that over time.
No company or sector is immune to market cycles, and being deliberate about your strategy is the best defense if not the only one.
It’s all too easy to confuse the market doing great for you with you doing great.
The management consulting experience had made me live some deathly scenarios through transformation projects on about to be bankrupt companies and the most common flaw was: Lack of strategy.
This insight alone drives my thinking and my decision-making and I am always optimizing for the long game.
My question is never "what am I getting out of this right now?" The really valuable game to play is the long game, over a timeline of years or even decades - Thinking in years.
Powered by this thinking, I am really trying to optimize for two things
1) Not climb the wrong hill and realize later I wasted years.
2) Try to be a submarine that is agnostic to the rising and falling tides of the market.
Anyone can do such divergent thinking using frameworks like 5C’s, Porter’s 5 forces, and timeless, SWOT analysis to arrive at a methodical plan.
But that is an expansive topic beyond the scope of this post so I am just going to socialize a simple thought exercise behind my strategy.
At the meta-level, my technique could be zipped into two steps.
1) Find a large enough market
2)Leverage my core competencies
In service of this, I analyzed Real Estate Macros for months before starting.
Below picture is a synthesis of that:
Look closely, and you will find that large MFs only represent 30% of the TAM (Total Addressable Market).
Guess what represents the 70%?
Single families and then 2 - 20 units.
- Low-density multi-family (<20 units) represent over 70% of total rent paid and have a lower prevalence of institutional ownership/property management companies.
- Smaller MFs represent the most significant number of households, have the highest income, are the least diverse, and are most likely to have children, thereby perfectly playing into COVID tailwinds, especially the demand for space.
It was easy for me to distill after looking at these insights that if I went for 1-20 units, I'll have a greater chance of acceleration against mom and pop investors by leveraging my tech and business background and greater potential for growth with a larger TAM.
Some other strategic advantages with 1-20 units include:
- Easy to make selective exits
- Diversified risk across many assets
- With easy access to capital through my fund, I can keep scooping good deals and maintain my velocity as opposed to looking for that one big deal = opportunity costs.
- I can put a rockstar operational team much faster as the learning curve is lower.
Needless to say, there are cons but to me the net sum is positive.
Note that I am not saying smaller MFs are always better. There are many inputs to consider in a strategic exercise like,
- Access to capital
- Time Horizon
- Team competency
- Investor goals
- Risk Tolerance
The output will be different as such and in many cases, larger multifamilies or alternate asset classes can be a better pick. Just not in my case and not now.
So, those are 500 words to say just 3: Have a strategy