
And that's why scale is the Holy Grail in real estate.
Why do real estate investors like Donald Trump, Grant Cardone, and Sam Zell have real estate portfolios with thousands of units under management? Like them or hate them, when it comes to real estate, these are men to be respected. In addition, these men know the power of what scaling can do for a business. The smaller the deal, the more of a liability if you ask me. Now let me clarify, everyone that invests in real estate doesn’t have the same goals. Not everyone wants to scale and grow, and acquire 10s and 100s of millions of dollars in assets overtime. Some investors are content with making $200 of passive income a month, and using that to save over time into retirement, and that’s ok. 10-unit Scenario: Priced at 100k a door at an 8% cap rate (return on investment based on the income a property is projected to create) for $1,000,000.- Purchase Price: $1,000,000
- Down Payment: $250,000
- Debt: $37,500/yr. Assuming buyer financed 750k at 5%.
- Monthly Rent Per Unit: $1000
- Net Operating Income (Income minus Expenses) : $48,000 (120k - 50% expenses, minus 10% management fee = 48k )
What happens if a tenant moves out?
Well as the owner of the property you now are responsible for $1000 for the month and have to scramble to find a new tenant. Not to mention you just went from 100% occupancy to 90%, imagine if two or three other tenants decide to move out. Your Net Operating Income for the month plummets tremendously, and there goes the deal.What happens if something breaks and needs to be replaced?
The property manager will handle that if you decide to hire one, which comes at a hefty fee on smaller properties at 10% of the gross income a year. Not to mention small property management companies are notoriously known for stealing. Now if you manage it yourself, you save the 10%, but just be prepared to receive phone calls about the typical tenants, termites, and toilets that landlords get. 100 Unit Scenario: Priced at 100k a door at an 8%cap rate- Purchase Price: $10,000,000
- Down payment is $250,000
- Debt: $37,500/yr. Assuming buyer financed $7,500,000 at 5% interest
- Monthly Rent Per Unit: $1000
- Net Operating Income: $600,000
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