Why Bigger Isn’t Always Better: Unlocking Value in Small Multifamily & Commercial Real Estate
Have you ever considered diving into real estate investing but felt overwhelmed by the sheer scale of large properties or the conventional wisdom that bigger is always better? In the world of real estate investing, many aspiring investors dream of owning massive complexes. But what if the secret to building a successful portfolio lies in starting small and focusing on strategic value-add? As an expert in real estate, I, along with seasoned investor Nawaf Kalasho, strongly advocate for small multifamily properties, typically defined as those with 6 to 50 units. We see them as an ideal starting point and a powerful asset class for building a robust investment portfolio.
The Power of Small Multifamily: Your First Deal Matters
Why small multifamily?
Faster Operations: Smaller units are often quicker to operate.
Quicker Needle Movement: It’s much faster to reposition and add value to an 8-unit or 10-unit property, potentially completing renovations and being ready to refinance in months, compared to the 1-2 years it takes for a larger 40-100 unit property.
Make Your Own Comps: For properties with six or more units, you have the ability to dictate your own comps by controlling rents and adding value, unlike 1-4 unit residential properties, which are dictated by community comps.
Less Competition: In the 5 to 50-unit range, you’re primarily competing with mom-and-pop investors, not institutional groups or hedge funds, giving sophisticated smaller investors an edge
Accessibility: Although it is more challenging to find great small deals with value-add potential now, brokers who recognize your ability to close quickly and reliably can create an “open flooded pipeline of off-market deals” for properties under 50 units.
Nawaf’s firm, Kalasho Co., which manages everything in-house, recently closed on a 10-unit property with significant value-add potential. Their plan includes extensive renovations: parking lot, roof, new boiler, HVAC, brand-new kitchens and bathrooms, flooring, and exterior LED lighting to enhance safety and appeal.
The Non-Negotiable: In-House Property Management
One of the most critical takeaways in owning multifamily properties is the absolute necessity of managing your own deals. Both Nawaf and I started with third-party management and quickly realized its pitfalls.
Faster Value-Add: What took a third-party management company three years to achieve, Nawaf’s team can do in about a year. This speed is crucial for value-add investors looking to refinance quickly and redeploy capital.
Protecting Your Money: No one will protect your money as well as you. Third-party companies often spend unnecessarily or reactively, such as sending an emergency plumber for a leak when simply telling the tenant to shut off the faucet might suffice.
Control Over Operations: The money in real estate is truly made in the operations. Without direct control, you risk high vacancies, soaring expenses, and depressed Net Operating Income (NOI).
While acknowledging that some great third-party management companies exist, finding them requires luck, and they may not care for your product as much as you do. For investors with demanding day jobs, such as emergency room physicians, managing directly may not be feasible, but the financial impact is clear.
Overcoming Fear and Getting Started
A significant barrier for many aspiring investors is fear and “paralysis by overanalysis”. I can’t emphasize enough the importance of taking action:
Don’t Be Afraid to Buy: Many people are hesitant to buy, especially when considering current cap rates and interest rates. However, if you’re buying a value-add property, you’re looking at its potential in a year or two, not just today’s numbers.
“What’s expensive today is cheap tomorrow.” This quote from Nawaf’s mentor encapsulates the reality of an inflationary society where buildings tend to appreciate.
Find a Mentor & Network: Seek out experienced investors who have been in the field for decades.
Forcing Value: Success stems from being creative and identifying ways to add value in underperforming or failing businesses. This isn’t just for real estate; it applies to any business.
Fiscal Discipline: Real estate acts as a powerful tool for fiscal discipline, locking away capital into an asset that can’t be easily spent on “stupid stuff”.
Control Your Investment: Unlike the stock market, you have significant control over your real estate investments. You make your own luck.
The Challenges of Growth and Scaling
As portfolios grow, new challenges emerge:
Scattered Sites: Managing properties spread across different locations can be difficult for maintenance and leasing. Nawaf’s solution is a regional structure for maintenance teams and in-house leasing agents, noting that clustering properties in the same region makes management easier.
Finding Larger Deals: Properties of 100 units or more are “feast or famine”—they are much harder to find, often held by larger companies or hedge funds, and frequently lack significant “meat on the bone” for value-add.
Nawaf and I both agree that focusing on “quality over quantity” is key. It’s better to buy 10 great units in a strong market than 100 in a distressed one with no potential for appreciation.
