SS46: Understanding Why Small Apartment Complexes Have Inconsistent Cashflow

Charles explains why smaller apartment buildings and small portfolios have inconsistent cashflow.

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Talking Points:

The dream of most real estate investors is to buy a predetermined number of units and enjoy the “passive income” that is produced from them – the reality is most real estate investments are not passive – even if you have a property manager
Why?
- When someone is designing their acquisition goal; it usually is 25-50 units where in their calculations they are able to make $10k+ per month passively (typically, $200 per unit per month is the cashflow metric they are using)
- They also might have their goal for 20 units; but with no debt
- These are all great plans in theory; but real estate investment is a business; not a passive investment like mutual funds; tenants move in and out, stuff breaks, items need to be replaced; wear and tear needs to be addressed
Mark Cuban “Sales Cure All” – more gross income solves all problems; this holds true in real estate investing as well but could be worded a different way; more units paying rent; solves all problems
How do you design your portfolio to be more consistent and less volatile?
- If your plan is to purchase the 25-50 units and create passive income at $10k+ per month; keep this plan but mix it with some investments in larger properties; the easiest way is to passively invest; or partner with some other active investors in a joint venture; it gives you more exposure, to more units, to more income streams; equally more consistency in cash flow

For example; if you and I have $1 million invested in real estate; you own 20 units free and clear and I own a small part of (20) 200-unit apartment complexes or 4,000 units total; who do you think will have more consistency in their cash flow? My income is based on 4,000 income streams yours is based on 20; what happens if 2 tenants move and they are vacant, 2 don’t pay and 1 is under eviction; 25% of your cashflow is gone

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing why small apartment complexes have inconsistent cashflow. So the dream of most real estate investors is to buy a predetermined number of units and enjoy the passive income that is produced from them. The reality is most real estate investments are not passive. Even you have a property manager and best they’re semi passive, but why? Well, when someone is designing their acquisition goal, it’s usually 25 to 50 units where in their calculations they’re able to make $10,000 plus per month. Passively typically about $200 per unit per month is the cash flow metric that most people use. You know, they might also have their goal for 20 units, but with no debt. And these are all great plans in theory, but real estate investment is a business, not a passive investment like mutual funds.

Charles:
You know, tenants move in tenants, move out stuff breaks. Items need to be replaced, wear, and tear needs to be addressed regularly. And mark Cuban has a great quote sales cure. All, you know, the more gross income solves all problems, and this holds true in real estate investing as well, but we could be worded a different way. You know, more units paying rent solves all problems. So how did you design your portfolio to be more consistent and less volatile? If you plan is to purchase the 25 of the 50 units and create passive income at $10,000 per month, keep this plan, but mix it with some investments in larger properties, easiest way is to passively invest or partner with some other active investors in a joint venture. And it gives you more exposure to more units to more income streams, equaling more can consistency in cash flow.

Charles:
For example, if you and I have a million dollars invested in real estate, you own 20 units free and clear. I own a small part of 2200 unit complexes or 4,000 units total, who do you think will have more consistency in their cash loan? You, I income is based off 4,000 income streams. First, yours is based off of 20, you know, for you, what happens if two tenants move out and they are vacant, two don’t pay and one is under eviction, you know, 25% of your cash is gone. I mean, you trying to make your debt payments and all your other payments or your other expenses and management is going to be an issue. So if you’re investing in multi-family and small multi-family yourself, I would really strongly suggest that you start looking into larger passive investments while also possibly partnering in joint ventures. Even if it’s in your same market with larger properties. So you can have more units that are paying you every month. Thank you for listening. Remember to rate, review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

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