Since our founding, we have focused on ambitious growth within the multifamily property sector. Our current strategy favors smaller acquisitions, typically from 40 units and up. This approach allows us to expand rapidly and attract smaller investors, but it is not without challenges. Part of our job is to continuously gather and apply on-the-ground multifamily insights, ensuring our strategies are grounded in practical experience and real-world observations.
The Case for Larger Multifamily Investments
Our team is constantly evaluating the most efficient strategies for property management and acquisition. Experience has shown us that the sweet spot for operational efficiency starts at around 100 units, with 200 to 250 units being an ideal range.
Typically, we expect one full-time personnel per 100 units. For a 200-unit property, this translates to two employees in the office and two on-site.
The operational efficiencies of larger properties extend beyond just staffing ratios. With more units, we can offer better amenities and services to tenants, such as well-equipped fitness centers, swimming pools, and common areas that foster a sense of community.
These amenities, while costly to implement, can significantly raise the property's appeal and justify higher rents.
Managing numerous smaller properties presents significant operational challenges and resource constraints. It is particularly difficult to staff small properties efficiently.
With a recent 40-unit acquisition in Kannapolis, NC, we were fortunate to find a part-time manager, but we recognize this is not always feasible or optimal.
The manager, who works full-time at a nearby community, can dedicate time to our property, however this arrangement requires careful coordination and may not be suitable in all cases.
Larger multifamily acquisitions offer potential benefits that we keep a close eye on.
These include operational efficiency through centralized management, the ability to attract and retain experienced property management professionals, and the opportunity to spread fixed costs over a larger number of units.
For instance, the cost of a full-time property manager or a sophisticated property management system can be more easily justified for a 200-unit property than for a 40-unit one.
As we refine our strategy, we are weighing these factors against our current approach.
Our goal is to find the right balance that maximizes value for our investors while providing the best possible living experience for our residents. While larger properties offer clear operational advantages, we must also consider factors such as acquisition costs, market movements, and our focus on opportunistic acquisitions even of smaller assets.
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The Case for Smaller Properties
Our current preference for acquiring smaller multifamily properties is a strategic choice we have made to facilitate prudent growth. This approach allows us to enter markets quickly and provides opportunities for scaling without taking unnecessary risks.
We have found that smaller properties often have lower barriers to entry, enabling us to build our portfolio faster.
These acquisitions typically require less capital, making them more accessible and allows us to grow into new markets with a balanced risk-return profile. This aligns well with our current family-owned structure and helps us diversify our portfolio into less competitive markets.
Diversification Matters
Another advantage of focusing on smaller properties is the ability to diversify our portfolio across different locations and property types. By acquiring multiple small properties in various markets, we can spread our risk and potentially capitalize on growth opportunities in different regions.
This strategy also allows us to gain valuable insights into multiple markets, which can inform our future investment decisions.
Our acquisition team is adept at identifying these opportunities, which are often overlooked by larger institutional investors.
This approach can yield higher per-unit returns in specific markets, especially when we can implement effective value-add strategies through leveraging the expertise of our in-house management team.
While managing multiple small properties poses significant challenges, including the need for extensive coordination, it also underscores the importance of leveraging technology and data for effective management. Furthermore, competing for larger properties can be difficult, especially when facing bigger companies that can swiftly adjust their bids in the final stages.
Smaller properties also tend to lack the economies of scale that larger properties benefit from, particularly in terms of operational efficiency and the ability to provide a wide range of amenities.
Despite these challenges, our current strategy allows us to remain nimble and responsive to market opportunities. We can quickly pivot to different markets or property types as conditions change, providing us with a level of flexibility that might be harder to achieve with larger, more capital-intensive investments.
Evaluating the Trade-offs: Small vs. Large Multifamily Properties
Beyond the operational and financial considerations already discussed, there are several other factors we weigh when evaluating small versus large multifamily properties.
Market Positioning:
Smaller properties often allow us to target niche markets or specific tenant demographics more precisely. For instance, a 50-unit property in an up-and-coming neighborhood might appeal to young professionals seeking a boutique living experience.
Larger properties, however, typically need to cater to a broader demographic to maintain high occupancy rates.
Renovation and Value-Add Potential:
The scope and impact of value-add strategies can differ significantly between small and large properties. In smaller properties, even minor improvements can have a noticeable impact on overall appeal and rental rates.
However, larger properties offer the potential for more substantial value-add projects, such as adding or upgrading community amenities, which can significantly boost the property's value and attract a higher-paying tenant base.
Risk Profile:
Smaller properties can present a higher risk in terms of occupancy fluctuations. A few vacant units in a 75-unit property can have a much more significant impact on cash flow than the same number of vacancies in a 200-unit property.
Conversely, larger properties may carry higher market risk, as they are more susceptible to broader market shifts and may be harder to sell quickly if needed.
Management Intensity:
While we have discussed staffing, it is worth noting that the management approach differs between small and large properties. Smaller properties often require a more hands-on, personalized management style, which can be advantageous in building strong tenant relationships but may be more time intensive.
Larger properties benefit from more standardized management processes but may lose some of the personal touch that smaller properties can offer.
Technology Integration:
Larger properties often justify more significant investments in property management technology, such as advanced security systems, smart home features, or comprehensive property management software. These technologies can improve operational efficiency and tenant satisfaction but may not be cost-effective for smaller properties.
Exit Strategy:
The potential buyer pool can vary greatly between small and large properties. Smaller properties might appeal to individual investors or small investment groups, potentially making them easier to sell in certain market conditions. Larger properties typically attract institutional investors, which can mean a longer sales process but potentially higher valuations.
Conclusion
Our journey in the multifamily real estate sector is one of continuous adaptation. We recognize that the optimal property size may vary depending on specific market conditions, demographics, and our own growing capabilities. As we move forward, we always engage in thorough market research, rigorous financial modeling, and careful consideration of our investors' goals.
We remain flexible in our approach, always aiming to maximize value for our investors while providing quality housing for our residents. By balancing the advantages of both smaller and larger properties, we are building a resilient portfolio that can deliver strong returns across various market cycles.
