Start Out Big Or Small?
If you want to invest in your first property, what is the best type of property to cut your teeth on? Should it be a single family unit with a small rate of return or a large multi unit building with a good sized rate of return? We think we may be able to scrape up enough to buy the large building but don't want to get in over our heads. If we went that route, we would be starting out using a management company due to location. I am afraid that if we start out small, it will take a long time and many properties before we see a useful payback. :-?
I have stuggled with that exact same question....the numbers seem to work so well on a big deal, but it could go the other way just as easy I suppose! If it wasn't for prudence and rationalization I would have already bought me a 500 unit apartment building!! I'm sure it can be done, but i don't want to learn the ropes by having 500 people screaming at my door...i'm starting with 1.....
Why does it need to be either/or?
I would probably say that managing a single home isn't the best possible preparation if you want to start managing large apartment complexes. However, if you know very little about real estate, starting with a few houses can be good experience.
If you're already somewhat savvy, II would start with a small to mid building like 8 to 15 units. That way, you're dealing with multiple tenants and learning all the tax/management/operational aspects, but not overwhelmed as if you were managing 50 or 100 units. Let alone a large complex like 200, 300 or 500+.
I personally don't believe the operational economics between multi-unit properties and single family dwellings are really comparable in terms of operational/management/cost issues. Multi-unit rentals have cost and management efficiencies that just aren't comparable like standardization of parts, ability to work out service contracts at fixed costs easily, fixed costs per unit, etc. Compare a 12 unit apartment with trying to manage 12 different single family homes, all with their own ideosyncracies. Not to mention the need to drive all over town. 8)
As for hiring a management company, I would advise against it if you really want to move into large complex management eventually. Most management companies charge excessive fees compared to your profit margins. Additionally, they won't necessarily be the most efficient in terms of operating cost efficiency.
Look at things this way. If we're trying to make money with OPM, they're managing your assets with OPM (Yours!).
My personal preference is to learn/build all the systems and processes and then build a management team and train them. This way you retain a higher level of control over costs (IE, you get to negotiate with contractors, suppliers, employees as well as clearly define operational policies). Once you have all your systems in place, just expand your team, train the staff, and Xerox your way to your real estate empire.
Of course, if you ever find yourself owning complexes with 50, 100 or more units, you'll rapidly find that you really don't need alot of them before you've moved into the 7 to 8 figures range in terms of assets.
Hope that helps.
Galahad
Well I wouldn't say I was real estate savvy per say, but I am catching on really quickly. I just am of the mindset that buying a mixed use building with 9 units for $180,000 instead of a house for $75,000, is going to be a better decision down the road. My wife is of the opposite opinion at the moment.
For the building we are looking at, we would have to use a managemet company for the timebeing. The area is several hours away by car. This is....that is the area we want to move to eventually. So I thought it would be good to look at investing there instead of buying here and having to sell within a couple years to move up there. I am a pilot and can reach that area by plane is a couple hour trip to check on the property frequently.