Go Big or Go Home
Why I’m growing my real estate investments and producing economies of scale.
You’ve heard the saying, “Go big or go home.” In the case of real estate investing, when your business as a developer begins to grow, you have the option of continuing with the status quo or investing in bigger projects that can produce something called economy of scale.
What’s economy of scale? Put simply, it’s doing things on a larger scale or on a more efficient scale to reduce costs and build up the value and return of a product or business per unit. So how does this apply to real estate investing?
To find economy of scale in real estate, You have to start doing things on a larger scale. From single-family starter homes, to larger homes, to multi-family dwellings, economy of scale builds as you go bigger, and we’re going to look at how this works by focusing on three areas: time, management, and cost-per-unit.
The simplest way to create economy of scale with multi-family units is with time. When it comes to getting anywhere from four to 140 units of dwelling, you’ll save my time bidding and renovating one multi-family building as opposed to multiple single-family units or small multi-family units such as duplexes. The more units under one roof, the more you save in time for the same number of doors. You negotiate for one building, plan renovations and rehabilitations for one building, collect quotes from contractors for one building, you work with one contractor, one designer who gives one design which is then replicated, and the jobs get done once in a multi-family unit. This is in direct relation to the same number of dwellings in single-family units; you would have to perform these tasks for every single building, hire more teams and contractors, and tie up more of my time so that you can’t continue to grow and develop.
And then there’s the concept of management. If you’re managing four, eight, ten single family or duplex properties in multiple locations, you need multiple management teams. This means more money paid out to employees creating a bigger payroll for my company. You may have grown, but you haven’t created economy of scale. Economy of scale comes into play when you invest in multi-family units on a larger scale, meaning you save on cost to run the building. One management team services a large building with multiple doors.
But down to the meat and bones of it all: dollars and cents. In the end, real estate investing is a money game. Time and people aren’t the only things we want to save on. There needs to be tangible money to be made. And that brings us to cost-per-unit. Let’s look at the cost of renovations. First of all, when looking at renovations, larger projects are generally prices more competitively. Why? Because it’s more valuable to a contractor to work one large project with a lot of income than a few small ones. So, for instance, if you had to re-do a roof, the price of a single-family dwelling or a small duplex might be $3,000. That’s $1500-$3,000 per door/unit. With a large building of 140 units, you might pay $70,000 for a new roof, but splitting that between 140 units means your cost per unit has gone down to $500. That means you’re saving as much as $2,500 per door as opposed to a single-family or small multi-family unit. And this translates directly in my returns. Less money spent per unit means more returns for both you and your investors.
The same goes for advertising vacancies. If you have five or so vacancies in a mid-large multi-family building, you only have to advertise the one building. If you have five vacancies in five different locations, you need to advertise each and every one. You’re cutting my advertising bill down by 80% just by switching to a single large multi-family building as opposed to a single-family unit or duplex. Once again meaning, less cost, more return.
When it comes to financing a large multi-family building, you’re getting one mortgage, as opposed to many. You’re working with a group of investors on one project, as opposed to managing many investors in many projects, you’re advertising for one building with multiple vacancies, as opposed to advertising multiple locations.
So, why go big or go home? When it comes to my business model, we want to grow in size, efficiency, and profit—the trifecta—and the best way to do that is by growing economies of scale. By producing economies of scale, you’re creating more money for both your business and for your investors through time, management, and per-unit cost.
For more information on economies of scale and how they work, visit: https://www.investopedia.com/terms/e/economiesofscale.asp
https://www.investopedia.com/insights/what-are-economies-of-scale/
