Owning larger investment properties can be a great way to grow your real estate portfolio and make money. But it’s not the right choice for everyone. The decision of whether to buy a smaller or larger property should be based on your personal goals and needs. In this post we’ll discuss why you might want to consider getting a larger investment property and how doing so you could experience the benefits of real estate investing.
If you are looking to make money through investing in property, it is important to understand the different types of investment properties. The type of property that you choose will depend on your financial goals, but also on the location, price, and rental potential of your chosen location as well as how much work needs to be done once you purchase it.
Owning Larger Investment Properties
You might be thinking that all this sounds great but is too expensive for the average person to afford. It’s true that larger investments require lots of capital upfront; however, there are ways around that issue such as investing with a group. So, if you’re going to invest in real estate, why not go big? In this article, we are going to cover 8 key perks of owning larger investment properties.
01 | Creatively Use the Extra Space
One of the greatest advantages of getting a larger property is that you have more room to work with. You’ll be able to get more for your money, which means that you can use a value-add strategy from the beginning without having to take on as much risk. In addition, as your portfolio grows, you’ll have more opportunities for raising revenue or decreasing expenses to optimize its return on investment (ROI).
One of the best ways to add value to a property is through renovations and repairs. By getting a larger property, you can do more things with it. You’ll have more space and flexibility to implement value-add strategies, which could be anything from renovating the interiors of your unit, to a redevelopment where you build extensions off the back of units (e.g., adding a second floor or garage), or even converting part of the building into commercial space. The possibilities are endless – what matters most is that you find something in line with your needs and desires as an investor so that it becomes an asset for years to come!
While a value-add strategy is typically employed by altering the physical space or features, the core principle is to either raise revenue or decrease expenses. This can be done without physical changes. When buying a larger property, you have more opportunities to change the financials of the property through the many different value-add methods. The more units a place has, the more chances you will have to raise revenue. Additionally, larger properties can sometimes have inflated expenses, which gives you the opportunity to find ways to cut costs and maximize your Net Operating Income (NOI). If you’re looking to get the most out of your money, then a larger property will let you do just that.
02 | Leverage Economies of Scale
The next reason why you should consider investing in larger properties is because of economies of scale. These are the cost advantages that an organization obtains due to its size, buying power and other factors. This means that your rental income will be higher as well as your expenses lesser, which in turn helps you make a better return on investment or ROI for your property.
A large property will provide economies of scale because it can be more cost-effective to maintain. A larger property has access to better maintenance staff, who can do the job cheaper and faster. It will also save on transaction costs, as it doesn’t need as many contractors or employees as a portfolio of small properties would require.
Depending on the real estate sector of your investment property and the real estate market, you may also have a lot more negotiation leverage with large property owners when compared with small ones because there are fewer options available for them at any given time and location. Particularly with vendors, larger properties carry more buying power so you can negotiate down your costs. When looking at larger properties, there are several attached financial economies of scale benefits:
- Larger properties generally have a lower cost per unit.
- Property taxes may be lower per square foot with less land as opposed to building space.
- Better financing deals may exist for a bigger property.
- Insurance costs per unit may be lower on a larger property.
- Large portfolios also tend to pay less in property management fees since the manager can afford to take a lower percentage of the larger income stream.
Although this also depends on the economic cycle, by using this strategy you can get better prices for your services because you’re buying in bulk, and you have lower costs per unit!
03 | Simplify by Owning Larger Investment Properties
Larger properties may help you streamline processes, making it easier to do more with less.
You can do more with fewer people, money, time, and energy. You can do more with less. You only coordinate and manage the processes for one property, rather than several. Imagine 3 investors: Investor A owns a 24-unit property while Investor B owns 6 4-unit properties, and Investor C owns 24 single-unit properties. All investors are earning the same gross margins on the property. However, for each property each investor will need to assimilate the following:
- Investor Capital & Syndication Documents
- 4 Real estate Financial Statements (income statement, cash flows, balance sheet, rent roll)
- Separate LLC and Correlating Founding Documents
- Insurance Policies
- Loans
- Property Managers
- Annual Tax Documents
These processes are streamlined by owning larger investment properties. For this reason, of the three investors, Investor A will have the highest net profit and will have invested the lowest amount of time.
By having a simpler process, there’s less chance there will be mistakes made, hopefully making all parties happier overall!
04 | Lower Time Requirements
You can do more with the same amount of people because you can do more with the same amount of time. When your company’s efforts are focused on a single large asset rather than several smaller ones, employees will spend less time traveling between locations or managing multiple mortgages at once. When everyone has their attention focused on one larger project at hand instead of many small ones scattered across town or across multiple states or countries, they’ll also be able to complete tasks faster since they won’t need as much downtime between projects (i.e., driving from location A where they’re working now back home before heading over again tomorrow morning). Rather than hiring additional employees to handle your day-to-day operations, your team’s workload will be spread across a single asset instead of several, so each employee will have fewer properties to manage on their own and have more time to implement your investment strategy.
Some ways you will save time include:
- Faster Unit Acquisition
- Less Travel Between Units
- Fewer Closings
- Fewer Due Diligence Periods
- Fewer Loan Originations
05 | Bigger Property = Bigger Brand
For an investor, one of the key benefits of owning larger investment properties is that it will be easier to build a brand and your reputation. Some investors have been able to turn their properties into destinations by providing great amenities, locations, or services. The best way for you to build a brand is by getting a larger property so that you can make all these possible!
You will have an easier time building your brand and reputation. A larger property will give you access to better locations and zoning ordinances. This allows you to offer more amenities, attract more customers, be more efficient in running the property, and provide greater cash flow from your investments. With a larger investment property, it is also easier for investors like yourself to build their brands or become well-known by doing things like holding meetups or events at their properties.
Tenants often will have pride in their community and their building, especially when a strong brand is present. This will create opportunities for great financial benefit. You will attract more customers if your investment property has a great reputation and more units because there will be extremely high demand for your units. This gives you access to a greater cash flow for your business through raising rents. You can use this cash flow as capital for purchasing other properties or reinvesting in existing ones (if it’s feasible).
06 | Larger Properties Appreciate Faster
If you’re looking to achieve maximum appreciation, then it makes sense to invest in larger properties. This is because the more you pay for a property, the more potential there is for that property’s value to increase over time. The size of your rental property, as well as its location and condition, will determine how quickly it can appreciate. In general, larger apartments increase in value faster than smaller ones. If you build a large apartment complex or purchase one that already exists and renovates it, you can take advantage of this fact.
If you plan on capitalizing on a hypothetical appreciation of your investment it is critical for you to understand property valuation and how to compare investment opportunities.
07 | Fierce but Fewer Competitors
When you’re looking at larger properties, it’s important to know that there will be less competition. The reason for this is that larger properties are harder to finance and therefore have less exposure in the marketplace. While competitors in larger value ranges are especially competent, there are fewer of them.
There are two main reasons why competition can be a bad thing for an investor:
- It makes it more likely that someone else will beat you out on the deal. It makes it more likely that you will lose money on your investment because of bidding wars or people overpaying for the property. With larger properties, you may be able to get better deals on your properties because there are fewer people out there who are looking for the same thing as you.
- If there is less demand for a particular property type or location, then it is generally going to be cheaper than if there was high demand for that property type or location. From a lease operations standpoint, fewer competitors mean there are fewer expectations of you from your tenants. A multitude of competitors may force certain features of a lease to be more prevalent and increase your expenses or create rent decreases to be competitive for the same tenant pool.
08 | Minimize Risk
Even though you have more money invested into a larger investment property, there are larger properties that carry less risk.
- Less Liquidation Risk
- Less Vacancy Risk
Liquidation Risk
There are several reasons why it’s easier to divest larger properties. One of them is that you can sell a larger property to a single buyer in a single transaction, either as an individual or through your brokerage firm. When you have a portfolio of multiple smaller properties, simultaneous liquidating your interests in them is more challenging.
By disposing of your real estate assets in one transaction, you have more options in your exit strategy. Property exchanges through the IRS 1031 exchange will become simpler and easier with less time, paperwork, and risk. If you wanted to trade in your current portfolio of properties, it would be harder than one single larger investment property since the IRS has time restrictions for the 1031 exchange. Additionally, if your property is held in a real estate syndication or a blind pool investment fund, it will be easier to close the deal with a larger property for similar reasons.
Vacancy Risk
If you want to make money and reduce the risk of losing it all, buy a building with more tenants. This will lessen your vacancy risk per building, which means that you won’t have as many empty apartments in between tenants. You’ll also have a greater variety of tenants to choose from, including people who work at different places and have different backgrounds, which means they’ll pay their rent in a timely manner and take care of the property while they live there—all benefits for your bottom line.
Diversification Tips while Owning Larger Investment Properties
While a larger property can minimize vacancy risk and liquidation risk, of course, smaller properties have spread-out units and less location risk. There are several ways to reduce the risk of investing in real estate. One way is to diversify your portfolio by spreading out your investment across multiple properties, markets, and price ranges. This can be done through single-family rentals, multi-family investments, or commercial properties. While this method may seem expensive at first glance (you will have to pay for more properties), it does provide a greater degree of safety when compared with investing exclusively in one type of real estate asset.
Should you Opt for Owning Larger Investment Properties?
You can impact your portfolio in many ways with larger properties. Larger properties can be more profitable, allowing you to diversify your portfolio and increase the cash flow of all properties.
Before you go any further, it’s important to consider whether a larger property is right for you. Larger properties can be more difficult to manage, they typically require more time and money than smaller properties, and they may require more experience than what you currently have. If this is your first investment property purchase or if you’ve never bought a rental property before, then we highly recommend that you build up your skills by finding investment opportunities in your range.
However, if you are eager to experience the perks of owning larger investment properties, you can always reach out to us at invest@eikoninvestments.com to invest with our team of professionals.
Happy Growth.
