Yes - It’s Still OK to Start Small - But Why More Units Are Better in MultifamilyReal Estate

When investing in multifamily real estate, more units often lead to better financial performance. While smaller properties like duplexes or four-plexes can be good starting points, scaling up to buildings with more units offers significant advantages. Here’s why:

Economies of Scale Lead to Lower Costs. Owning more units allows you to spread costs across a larger number of tenants, making operations more cost-efficient. Some key benefits include:

A) Lower per-unit management costs: Hiring a property manager for a 20-unit building is far more cost-effective than managing multiple duplexes.

B) Bulk purchasing discounts: Appliances, maintenance supplies, and renovations are cheaper when bought in larger quantities.

C) More efficient marketing and leasing: Filling multiple vacancies in one location is easier and less expensive than advertising for separate properties.

More Units Tend to Provide More Stable Cash Flow. With more units, rental income is spread across multiple tenants, reducing financial risk. If one or two tenants don’t pay on time or a few units sit vacant, the remaining occupied units continue generating income. This stability ensures you can cover expenses and maintain profitability, even during market downturns.

Greater Ability to Increase Property Value. In multifamily real estate, property value is largely determined by Net Operating Income (NOI) rather than comparable sales. The more units you have, the more opportunities there are to increase NOI and drive up the property’s value. For example:

A) Raising rents by even a small amount across many units can significantly boost revenue.

B) Improving operational efficiency, such as reducing maintenance costs or renegotiating service contracts, directly increases NOI.

C) Adding value through amenities (laundry facilities, parking, storage units, etc.) creates additional income streams that enhance property value.

Since commercial real estate is valued based on income rather than local market comps, increasing NOI in a 50-unit building has a much greater financial impact than in a four-plex.

So, to sum it all up - while larger multifamily properties require more capital upfront, the long-term benefits of lower costs, more stable cash flow, and the ability to increase value through NOI growth make them a smart investment. So, while we do recommend starting small to get a feel for how investment properties work - eventually focusing on buildings with more units can help you maximize efficiency and profitability.