SS61: Why are Large Investors Acquiring Smaller Properties

An approach that is becoming more and more popular in today’s market is large investors purchasing smaller properties. Charles’ company has utilized this same strategy several times over the past few years and in today’s episode, Charles discusses why this becoming more relevant along with the pros and the cons.

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Talking Points:

Our firm started purchasing smaller assets a few years ago in one main market, Tampa. In recent months though we are seeing other investors take this same approach. So why is this happening when every syndication/investment course/coach out there is preaching to anyone that will listen to only buy 100+ units?
The main reason is the price.
- It is typical that complexes with 100+ units will sell at a premium when compared to smaller complexes. This is something that we are seeing in a number of markets throughout the Sunbelt; including Florida.
- Yes, in a perfect world, we would only purchase 100+ unit deals but in hot markets, we have been looking at smaller deals, 50+ units; and not just 50+ unit complexes but putting together a portfolio of nearby properties in order to purchase as many units
- In one Tampa deal we purchased a 32-unit complex with 27 units comprised of triplex and quadplexes around it; making it a 59-unit deal
- In another Tampa deal we purchased a 22-unit property with a 68-unit property a couple of blocks away; making it a 90-unit deal
Points to consider
- The United States is seriously lacking multifamily and industrial inventory – not just large complexes but multifamily units in all size complexes
- In larger deals (100+ units), you are normally going to see less rent growth compared to a smaller complex since larger complexes have been targeted by most investment groups while complexes under 100 units are typically passed over (until now) by larger groups – this is mainly due to the fact that larger investors want to place 5+ million dollars in each deal and will pay a premium to do so
Cons
- Usually, no amenities
- Slightly harder to manage and lease units – not every property has a leasing office or onsite management
- If you have tens of millions of dollars to place (for each deal); this is not the strategy for you
- New investors in a market might be paying more for management until they have purchased multiple smaller complexes and get some scale
- You have to purchase more deals to place capital
- The time involved to do a deal is similar to a much larger asset
Pros
- You are still buying deals and placing capital
- Great for smaller groups or groups where you already have a management footprint in the market – the more units you buy; the less expensive your management becomes
- Smaller properties will typically operate on lower expense ratios than larger properties; mainly due to not having amenities
- Not competing with larger investors

Smaller deals are a less perfect market; I believe it is easier to find value in smaller complexes say a 10-30 unit deal or even a 50-unit deal vs. a 200-unit deal being sold by a very sophisticated investment group

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing why are large investors acquiring smaller properties? And our firms started purchasing smaller assets a few years ago in one of our main markets, which is Tampa. In recent months, though, we are seeing other investors take the same approach. So why is this happening? When every syndication investment course investment coach mentor out there is preaching to anyone that will listen to only buy a hundred plus units? Well, the main reason is price and it’s typical. That complex is a hundred plus units will sell at a premium when compared to smaller complexes. And this is something that we are seeing in a number of markets throughout the Sunbelt, including Florida yes, in a perfect market, in a perfect world, we would be only purchasing a hundred plus unit deals, but in hot markets, we have been looking at smaller deals, 50 plus units, and not just 50 plus unit complexes, but putting together a portfolio of nearby properties in order to purchase as many units as possible.

Charles:
In one Tampa deal, we purchased a 32 unit complex with 27 units comprised of triplexes and complexes around it, making it a total of 59 units. And then in another Tampa deal, we purchased a 22 unit property with a 68 unit property, a couple blocks away making it a 90 unit deal. Now there’s some points to consider. I mean, the United States is seriously lacking multifamily and industrial inventory, not just large complexes, but multi fineing family units in all size complexes in larger deals, hundred plus units, you are normally going to see less rent growth compared to a smaller complex. Since larger complexes have been targeted by most investment groups, while is under a hundred units are typically passed over until now by larger groups. And this is mainly due to the fact that larger investors wanna place, you know, five plus million dollars in each deal, and they’re gonna pay a premium to do so.

Charles:
Now some cons with doing this is usually the properties you’re buying have no amenities. There’s slightly harder to manage in leasing because not every property has a leasing office or onsite management. If you have tens of millions of dollars, a place for each deal, this is not the strategy for you, but new investors in the market might be paying more for management until they have purchased multiple smaller complexes and get some scale. So there’s more legwork involved because you’re gonna have to purchase more properties do more closings, underwrite, more deals in order to get the same skill you would’ve with just buying a larger complex. Now you have to purchase more deals to place the same amount of capital and the time involved due a deal is similar to a much larger asset. So if you’re buying a 50 unit property, the due diligence is very similar to you buying a 250 unit property, but you’re just not getting the returns.

Charles:
You probably once were a few years back. Now, some of the pros are, is you’re still buying deals and placing capital. So even if they’re going into smaller complexes, I mean, you’re still putting money in, you’re still putting your investors money into work and you can still make money on those. It’s just, you’re doing a lot more deals to place the same amount of capital. Now it’s great for smaller groups or groups where you already have a management footprint in place in the market, because the more units you buy, the less expensive your management becomes smaller properties will typically operate on lower expense ratios than larger properties, mainly due to not having amenities. And you usually don’t have full-time people in all the different positions. A rule of thumb that will use is every a hundred units. You have, you usually will have one office person, admin person, leasing person, whatever you wanna call ’em.

Charles:
And then one man, and it kind of goes from there. And that’s what you can kind of work off your numbers. If you’re in an older asset, you might need more on the handyman side, if you’re in a newer asset, you might be able to trim that a little bit. Like having two full-time people on a, a, you know, a new asset, that’s 250 units. Now smaller deals are less perfect and it’s a less perfect market. And I believe it’s easier to find value in smaller complexes, say 10 to 30 units or even a 50 unit deal versus a 200 unit deal. Cause it’s being sold by a very sophisticated investment group and they’re gonna have all the market knowledge. They’re gonna have all the broker price opinions. They’re gonna know exactly what this price, what the, what the property’s gonna sell for and what the value of that he is. So I feel that it’s a less perfect market and when it’s a less perfect market, that’s when you’re able to get a deal. So I hope you enjoyed, please remember to rate, review, subscribe some comments and potential show topics on picks at global investors, podcast.com. Look forward to two more episodes next week. See you then

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