Starting Small to Go Big in Apartment Investing
Most people overestimate what they can do in a year, but underestimate what they can do in ten. -Bill Gates
Over the past two years, I’ve recorded almost 300 episodes of the Diary of an Apartment Investor podcast and in so doing, I have spoken with hundreds of aspiring investors. One common mistake I see over and over again is the idea that they should start off buying very big apartments. They hear that there is much more efficiency when you purchase larger assets (which is true) and believe that they should reach for the sky and immediately tackle the 250-unit property. The problem with “thinking big” is that for most people starting in this business, the 250-unit property is simply out of reach.
Now, I’m not saying you shouldn’t think big. In fact, I want you to THINK BIG. More importantly, I want you to ACHIEVE BIG. Look again at the quote from Bill Gates at the beginning of the article: “Most people overestimate what they can do in a year, but underestimate what they can do in 10.” He’s someone that most definitely thought big and achieved big. I want you to think big, achieve big, and absolutely crush your 10 year projections, but the way to get there is not by overestimating what you can do in the first year.
Let’s talk about how starting small can in fact help you to go big much faster than going big on your first deal.
The Danger of Going too Big
In this business, there is a significant barrier to entry, and it comes from a few different angles. Lenders, brokers, sellers, and investors all give enormous preference to experienced operators and the aspiring investor must be able to push through to successfully purchase the first property.
Why do brokers, sellers, and lenders prefer experienced operators? Simple, they all get paid when the property sells and ONLY when the property sells. Experienced investors know what it takes and have all demonstrated their ability to close on properties and aspiring investors often come to the table completely unprepared to make a large transaction.
In order for an aspiring investor to gain a foothold in the apartment investing business, they must convince the brokers, sellers, and lenders of the world that they can actually close. Lenders will have minimum requirements, which typically include experience, net worth, and a certain amount of liquidity in order to give you a loan. The average CRE broker understands this very well and will seek to weed out anyone that does not meet these requirements. Additionally, they also understand that the potential buyer must bring the down payment plus closing costs to the table by the end of the contract period, so will also try to gauge their ability to raise capital before they spend any energy on them.
For example, if a team with a $2 million net worth, no experience, and the ability to raise $500k in equity is pursuing a $20 million deal, they will have a tough time convincing anyone to work with them. Not only that, if this team persists in looking for the $20 million properties, the brokers and lenders will eventually stop answering their calls or responding to their emails and texts. The hard truth is, if you stretch too far beyond your limits, you will actually do more harm to your reputation than good.
If the same team, however, is pursuing a $2 million property, then there is a clear path to closing, which drastically reduces the friction involved in finding their first deal. They will find that brokers respond much better to their inquiries and actually send them investment opportunities.
Bottom line, although I encourage you to think big and stretch your limits, the brokers, sellers, and lenders are looking for potential buyers who have a very high probability of closing. Stretching far beyond your limitations will only serve to increase the barrier to entry and leave you frustrated and dejected.
Law of the First Deal
One of my mentors speaks often about the Law of the First Deal. What this law says is that no matter how long it takes to close on the first deal, the second deal usually comes within a few months after closing on the first.
With the above in mind, it’s not hard to see why. Once a team closes on a property, they have demonstrated their ability to close; they have demonstrated their ability to raise capital; they have demonstrated their ability to qualify for a commercial loan. Now, when they talk with the brokers, they point to their accomplishments to prove they can walk the talk. Most people I’ve talked with have said that after closing the first deal, brokers actually seek them out instead of the other way around.
Closing on the first deal is what gets you into the game. Until then, whether you realize it or not, you're merely standing on the sidelines.
Starting Small to Go Big
I believe the most reliable strategy is to start small to go big. Instead of reaching for the stars on your first deal, focus on finding a deal that is reasonable for your team to purchase. In fact, starting with a reasonably sized property may get you to that larger property much quicker. Instead of spinning your wheels looking for the larger properties, you can get immediate traction on something small, and then use that first property as leverage to tackle those bigger deals.
I’ve found from personal experience and numerous conversations that the first deal will put you on the map – it will establish you and your team as closers and will open doors to get larger deals down the road. The first deal will build your reputation with potential investors and make it easier to raise capital for future deals. The first deal will also help you attract potential partners that can help you scale.
In essence, the first deal is your springboard to larger deals in the future, so why not start a bit smaller to get that first deal done quickly.
Right-Size for Success
The first deal is your starting point and has no bearing on where you’ll finish. Being able to right-size your deal will get you in the game faster and with much less friction, and once in the game, you can focus on scaling and growth.
Go ahead and think big. Be bold and reach for the stars. Just realize that building an apartment investing empire will take time and starting small is often the best way to go big.
Next article in the series: How to Right-Size Your First Deal (to be published soon)
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