E123 – Single Family vs Multifamily Part 2: Management + Diversification – Steven Pesavento
In this episode we’re going to be looking at income streams, the ability to diversify and some of the benefits of management within each of these types of assets classes. Do you have the time to self manage? What are the 3 key ways to find diversification when investing? What’s the upside of one building, with one maintenance team and one type of finish? All these questions answered and more on episode 123!
Learn more about investing with Steven at https://theinvestormindset.com/invest
Read the Transcript Here
Title: The Investor Mindset Podcast – EP 123 – MASTER -16 LUFS
Presenter: Steven Pesavento
[00:00:01] Steven: I’ve got some really exciting news; our operating partners on the commercial multi-family space have agreed to invite new investors in as some of our future deals. We are proud to bring these institutional style opportunities to investors within our community. In order to have access to these investments, you have to sign up at theinvestormindset.com/invest. And we have thousands of people who listen to the podcast, and we typically only allow 50 people to invest in each deal. So make sure you head over there right now because once we send out the email announcing our next deal, it’ll likely be sold out and oversubscribed. So get started at theinvestormindset.com/invest. And I look forward to seeing you on the inside.
[00:00:46] Narrator: This is The Investor Mindset Podcast. And I’m Steven Pesavento. For as long as I can remember, I’ve been obsessed with understanding how we can think better, how we can be better and how we can do better and each episode we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs in the nation.
[00.01:08] Steven: Welcome back to this week’s mindset minutes episode with The Investor Mindset. And I’m Steven Pesavento. And each week, I share mindset tips and investing strategies to help you grow your business. And this week, we’re continuing our four part series on comparing single family investing to multifamily investing and answering the question of which one is better for you. And we’re going to be talking specifically looking at the income streams, the ability to diversify, and some of the benefits of management with each of these types of asset classes.
So join us each week as we share more tips and strategies to help you reach true financial freedom through real estate and make sure you hit that subscribe button. So, again, setting the stage when we’re talking single family here, we’re talking about any properties that fall under the residential category. So anything below 5 units, we’re going to be lumping all together a single family, those small multi families as well, anything 100 units or above which commercial multifamily is typically what we’re focused on there. And we’re going to be calling anything 100 units or above or and calling that multifamily. And we’re going to be excluding an entire section of the multifamily space from 5 units all the way to 99 units. And we’re doing that because we want to make a dramatic comparison between investing in residential real estate aka we’re calling single family and multi-family.
And so as you guys know, I’ve been investing in real estate for a number of years and in the past three years I’ve bought and flipped or wholesale over 200 houses, I own a number of rental properties. I have sold a number of rental properties, and I have I have switched completely to focusing on commercial real estate.
And I’m going to be talking through the honest truth of why some things about single family are better and why some Things about commercial multifamily are better. And I’m going to let you guys decide, of course, I’m going to have some opinions, I’ve obviously made a shift, but I’m going to be making sure that I’m outlining some of the clear benefits of both of them. So let’s dive right in.
Okay, so one of the benefits of working specifically with single family is the ability to self manage the ability to quickly put a manager in place that is somebody that you know, like and trust, or to manage those properties yourself, right. So when we’re talking about single family, or small multifamily, it’s one of those things where there’s not really a level of economies of scale, we don’t get the same benefits that we’re going to see and I’m going to talk about when it comes to multifamily, but one of the benefits that is pretty clear with single family is that you have the ability to manage that yourself. If you’ve got the extra time, effort and energy, you can really benefit from doing self management in the single family space. Now a lot of people get burnt out on this and a lot of people hate Real Estate because they spend time dealing with direct management.
Now, one of the other things that’s kind of a downfall about single family is even if you put a property manager in place, there’s still a lot of responsibilities that are going to come as an owner, because you’re the person who has to manage that property manager, you’re the person who’s going to make decisions for that property manager deciding what should get fixed, how it should get fixed, what quote, you should go with signing different documents and paperwork that’s going to come through making sure that that property manager actually does what they supposed to, and ensuring and doing whatever you can to make sure that they don’t commit fraud, and it’s quite common in the small single family space. It’s common in frankly, any space that some of these managers you’re going to deal with might skim some money off the top. It sucks. Fortunately, I haven’t dealt with skimming myself, but I have dealt with plenty of property managers who did a terrible job of managing the property put terrible tenants in did not alert us to any of the problems going on. And frankly, our units were trashed when they left and we were the ones stuck with the bill. They had no, you know, liability or responsibility. And, frankly, they were difficult to even get them to, you know; help us go after the tenants for some of that money. But that was just a bad experience, right? But it’s an experience I think a lot of people have heard and have dealt with on the single family front.
Now, when we position over to multifamily, one of the benefits or the clear reasons to focus on multifamily or on commercial real estate in general, is because we’re talking about a much larger asset, when we’re talking about 100 units, that is spread out, you know, over one complex or maybe two or three complexes. One of the benefits that we see is that we are able to have on site management, we’re able to have onsite maintenance, and when you have on site management, you’re having one manager that you’re paying and is dedicated to running that building. So as long as you get a good manager in place, and you do a good job of managing that manager you’re going to see, you know, typically much better results, because the level of manager that you’re able to put in place is typically a little bit higher level on the commercial front.
Single family property managers, there’s some amazing ones out there. And there are a lot of really terrible ones. And one of the hard parts is really difficult to know the difference. And the other thing is, issues don’t come up quite as frequently when you’ve got one or two units versus when you’ve got 100. So you’re going to see problems start to manifest or become clear to you a lot faster on the commercial front. So when you’ve got on site management, there is some efficiency as far as leasing. That person is managing leasing for all the units on site, people are able to come right to that building, they’re able to be shown multiple different units. They don’t have to drive to those locations all around the state and they’re not managing other people’s properties that are only managing your own. So that’s a clear benefit.
Another benefit when you’re talking larger assets like multi family is that you’ve got on site maintenance. And one of the benefits there is that you’re able to better manage materials and inventory, you’re able to better manage those individual work hours of that maintenance team, and your cost per call per maintenance calls typically lower. And one of the reasons for that is, when we’ve got one type of finish throughout an entire building, we know exactly what type of finishes what type of materials, I’m going to need to go fix something in that building.
Now when I contrast that to the single family space, even if I own 10 houses, those 10 houses likely have 10 different faucets, they likely have 10 different toilets, they likely have 10 different types of flooring, and as you develop your single family portfolio, you’re likely to put some of the same finishes in and start kind of having some of the same benefits we’re talking about. But right off the bat, usually unless you’re building new or you fully renovated all of your units, you’re not necessarily going to have the same stuff right off the bat. So having access and being able to maintain your inventory is a little bit more challenging. And oftentimes when people are doing maintenance on a single family unit, the maintenance person is going to Home Depot, they’re buying the materials, they come to the house, they fix the thing, they have to go back to Home Depot, there’s kind of a back and forth that happens. And if you’re the one who’s doing this work yourself, you know exactly what I mean, because you’ve already been there and done it. Even if you’ve done work at your home, how many trips to Home Depot does it take to get a job done, sometimes more than you really like?
So one of the other benefits on the economies of scale front for multifamily is that the efficiency that you get when doing building renovations when you’ve got 100 units, or even if you’re only doing 20 or 100 units that you’re renovating? You’ve got the same floor plan. You’re doing it over and over again, you know what it’s going to take as far as time effort and energy and typically not always, but typically you’re able to get a higher caliber contractor and that’s not because there’s not extremely high caliber contractors in the residential space in the residential space. But what ends up happening is those high quality contractors and residential end up working with homeowners and homeowners typically pay three, four times as much as an investor pays. So when we were talking about cost management to get the same quality resource, it’s much more difficult on the single family space.
So kind of wrapping that all up in a bow, multifamily, obviously has some economies of scale, we can benefit from some of those same economies of scale and single family as you start buying more units and start finishing properties with the same types of finishes or buy similar properties. On the single family front, the upside is you can self manage, which means you can save a lot of money and sometimes put some more into your pocket. If you’re the type of person though that needs to be in control, then single family is 100% the route to go you want to be that person going out and shoveling the driveway or taking care of the lawn or managing the contractors that are going to do those things that should be the direction you go 100% without a doubt, if you’re the type of person who is looking to take advantage of those economies of scale and you want to be an active operator, then stepping into multifamily and working with an experienced operating team. That’s great, right? You can be the active asset manager and make sure those things happen, right from a high level perspective.
And if you want to be a passive investor, multifamily can be a great option because all of those things are managed by the asset management team by the operating team. And then you’re getting those benefits coming back to you. Because remember, again, when we talk about partnership, in some of these commercial deals, typically the way that that structured is that the operator or the asset manager is only getting paid. If the property does well, like 90 or 95, sometimes even 98% of the income that operator would make is based on performance, which means if they’re not doing a good job of managing the managers, if they’re not doing a good job of taking advantage of these economies of scale, they’re going to potentially work for years 5, 6, 7, 10 years without getting paid anything So it’s so critical for an operator to make sure that they’re doing these things, right. And that’s why when they buy these properties they’re typically going with some pretty conservative numbers.
Now, I want to underline something here. So when we look at diversification and multiple streams of income, one of the clear benefits is that there’s really three different ways that I like to focus on looking for diversification in my investment portfolio. And I can look for diversification across the deal. I can look for it across different locations or cities or markets. And I can look for diversification across different operators, different people who are actively managing those properties in those assets themselves.
So when I talk about across deals, I’m talking about across different properties, right. So if I’m a single family owner, maybe I own 10, or 15, or 20, different single family properties in my portfolio and total. Now maybe all of those are in the same location. Or maybe I’m diversifying across different deals or properties in one location. And maybe I’m also diversified in another location. So we can go and look at different markets to invest in maybe different areas of town, kind of those sub or micro markets that are within an area. And then of course, finally, we have the option of diversifying across operators, the person who’s actually managing these properties, versus who’s actually managing the investment managing my money.
If you’re a single family, direct owner operator, and you are the person who’s in control, you’re probably not going to be seeing any benefit of diversification across operators because you’re going to be the operator. But if you’re in commercial side, or you’re investing with partners, you could invest again across different operators, in order to start seeing some of those benefits you might invest across different deals across different locations and across different operating, have the ultimate diversification.
Now, diversification isn’t always good, right? Sometimes you might be better off focusing in I’m going to invest a large percentage of my portfolio in real estate because I know like and trust real estate, I’m an absolute expert there. And most of my money is going to be focused in that area. And I’m going to focus majority of it with one or two, or maybe three, one or two operators. And I’m going to look to, you know, become an expert in one specific location and maybe have different ways diversify in that location across different asset classes.
So we look at single family versus multifamily under this lens of diversification. Multi family is the winner when we look at specifically some of the benefits of diversifying across different tenants or leases, and the ability to diversify across different locations. Because obviously, you can diversify across different deals, but locations it takes an economy of scale to make sense to move into another market. If I buy one single family house in Minnesota, and I buy one single family house in North Carolina, it’s not going to be as efficient as a portfolio. Because I might not know all the market dynamics in each of those locations I do because I invest in both of those areas. But if you were going to go invest in another market, you’re not going to be focused on all the little intricacies that happen on local level. If you don’t have enough units there to make sense, and you’re not going to get the best management, they’re not going to focus and care for you in the same way, as if you had 50 units. And you were a huge client to them. It’s just frankly, the way it is.
And so when you’re investing from a single family perspective, it’s important to make sure that you’re building your portfolio in one location, and then maybe expanding it for five units in one location and you’re going to expand maybe five units in another location. Of course, you can buy one unit in one area and you can get some benefit there. But I think it’s really important that when you’re investing in an area that you’re looking to expand to buy multiple products. So you can really get that benefit and multifamily wins because when you’re buying 100 units, you’re essentially buying a business in this locale. And you’re able to put property management in place potentially from an operator or a property manager that you’ve already worked with in the past, potentially with the property manager that knows the area really well.
Then finally, if you’re a passive investor, you can invest across different operators. Me personally, I’m an active investor and I invest across different operators, both on the passive side and on the active side because I’ve got partnerships with different operators in different areas. And although majority of my focus is in one specific area or state, now I’m seeing benefits across the different sub markets that are within that area.
So wrapping it all up, single family has some clear benefits if you’re looking for direct ownership, and have the time to self manage now if you don’t have the time to self manager, you don’t want to be responsible for those things. And you are able to invest from a passive perspective, now multifamily is going to win. on this front, we talk commies of scale, and we talk about multiple streams of income with single family, you’ve got to buy enough units to get that same level of diversification and get some of those same benefits that I’m seeing and what I’m talking about when I am referring to some of the benefits that we see in multifamily.
So for me, it’s one of the reasons that I moved from single family to multifamily because I had bought a number of rental properties and I was having difficulty making the numbers work because things were so competitive, and I started applying for loans and realize, okay, well, the financing is more challenging when I’m looking at one single family home after I already own a couple of them then if I even go look for a commercial property, but you know, loan for 100 units, and kind of the story that I told you about earlier in one of our earlier episodes.
You know, one of my tenants recently moved out and they trashed the place that cost me over $5,000 but closer to 7000 results. done for the damage that those people did in the property manager was a big reason that the damage was so bad and that it didn’t get noticed until the very end. Of course, we’re all going to deal with these problems as landlords and as real estate investors.
But for me the economy of scale, having that on site management, having higher quality is just one of the reasons why I’ve gone that direction. So let’s continue this conversation in the Facebook group, head over to the investmindset.com/group. And join us in the discussion about which of these is better for you. Which of these asset classes fits your personality, your investment goals and your path to hitting true financial freedom? So I want to remind you guys, join us in for future discussions and join us for the past discussions that we’ve had on the same topic. So you’re going to get fully educated on some of the pros and the cons of each of these asset classes. And I want to thank you guys for joining me and for being such an amazing supporter of the podcast, make sure you hit that subscribe button, if you’re just joining us or if you’ve been listening and you haven’t yet and drop us a review on your favorite podcasting app, so we can reach more people.
And so I want to remind you guys to live a life worth inspiring others and you can do so today by applying some what we talked about so you can start reaching true financial freedom for yourself. And wrapping this all up into a quick bow, from a mindset perspective, the key to understanding to having the investor mindset is figuring out how can you benefit from the economies of scale? How can you benefit from the diversification and how can you create that within your portfolio? So ask yourself these questions and then start making decisions for yourself and for your family on how you can increase diversification increase economies of scale in your own portfolio.
[00.18:46] Steven: Thanks guys and I’ll see you on the next one.
[00.18:50] Narrator: Thank you for listening to The Investor Mindset Podcast. If you like what you heard, make sure to rate, reviews, subscribe and share with a friend. Head over to theinvestormindset.com to join the inside club where we share tools and strategies from the top investors and entrepreneurs and how to take it to the next level.