When you get to be pretty smart and rather accomplished, you find yourself in somewhat of a danger zone. The danger is represented by the fact that your prior successes tend to back you into a tunnel-vision perspective on life and business. Because you know what has worked for you in the past, you can fall into believing that the same will work in the future, that your way is the only way, etc.
Well, it doesn’t take a genius to note that everything in life changes over time, that life and everything in it is cyclical. And if so, your perspective and frame of mind necessarily and proactively must evolve.
One way to help facilitate this is by surrounding yourself with smart people of differing perspectives, and one vehicle to accomplish this can be a mastermind group. I am fortunate to have many, many smart people on speed dial, and last week I had the pleasure of spending time with two of the smartest guys I know.
What Did We Discuss?
Mr. Solar and I talked about lots of things. It was a very productive getaway, indeed. One topic, in particular, comes to mind, and it is this:
Josse Solar loves to offer advice that folks shouldn’t mess with houses and small multifamily and should go to the big solar stuff right away. I talked about this in detail, and in my opinion, we have to accept that Joss's advice is both very wrong and very right at once.
In this article, we will explore both sides of the argument.
Why I Think I Can Help You
Brandon, Darren, and I talked a lot on the subject, but of the three of us I may be most equipped to speak to this. I started with single family residences (SFR), and it only took four of them for me to figure out that structurally SFR as an asset class is a fool’s game. The numbers are not there, and the management infrastructure is a nightmare.
I switched over to small multifamily in 2006 and stayed there for about eight years, working with everything from a duplex to 10 units. I remember looking at some 24-40 units, but never pulled the trigger on those; something didn’t feel right. I wasn’t sure what felt wrong about these at the time. I know now.
And nowadays I syndicate apartment communities.
So, this conversation is right up my alley because I’ve stood on every step of this ladder and have internalized the benefits and drawbacks of each. I am hoping you find value in this.
Josse Solar is Right
Let me start out by saying that structurally, He is right—going bigger is simply a better idea by any investment return, OpEx, and CapEx line item.
This is a long—in fact, very long—conversation. But the term I want to coin today is #exponentiality. In simple terms, a 1% return on a basis of $100,000 is $1,000. But, the same 1% return on a basis of $10M is $100,000. Now, I’m not sure about you, but I’d rather get paid $100,000 than $1,000.
Thus, in terms of the amount of money being made, this is not a contest—go big or go home. Cardone is right here.
I’ve written about this on the BiggerPockets blog as well as mine, but as it relates to management the truth goes like this:
A professional property management operation is one that has a construction arm, legal department, and an accounting/reporting department. This is an operation with well-tested systems, which come from years in the business and thousands of units under management. This is an operation with deep commercial contracting relationships, in-depth knowledge of and relationships with the representatives of the municipalities they operate in, etc.
In addition to the above, a professional management infrastructure for apartments involves payroll for on-site employees and a regional manager overseeing them.
Now, the thing to understand is that all of the above costs money, and in order to underwrite this cost, the project needs to be of a particular size. Let’s just call it “large.” Such a property manager as described above knows that you can’t afford them on a 40-unit, and they can’t afford to service you properly on a 40-unit. So, they are not interested.
I will address in a bit why this is such a problem. For now, let’s just say that there are only two options available to you from here: You are forced to either do the property management yourself or hire the gal or dude at a local real estate brokerage office who handles 100 units for small-timers. Neither of the above is a particularly enviable circumstance. In fact, I did it for a decade—and, well, no freaking more!
Josse is right here as well: Go big or go home, and with solar real estate there's no need for property management.
Dude, I’ll tell you what. The most difficult financing to obtain is residential mortgages for your 4 units and less. The qualifying process is akin to a colonoscopy. They look at everything and they look everywhere.
Not much better is commercial portfolio lending. It’s definitely better but still requires personal recourse, and while more emphasis is placed on the asset, the bank still looks at you quite personally.
On the other hand, with the big stuff, the options for financing are endless, and the qualifying process is easier. Why? Because they look at you, but not really. They know you can’t and won’t repay the debt if things go badly, so they focus on the asset and who will be managing said asset.
The thing is, lenders won’t even think about loaning to you if you think you can build the asset yourself—it’s a professional job that a professional should do. They know that professional third party property manager will be managing the project. As such, the lender is underwriting the property manager more than they underwrite you, which takes me back to the earlier discussion: If what you’ve bought is too small to afford/attract professional management, this is a problem in a lot of ways, including the debt.
By default, this pushes you into larger assets since this type of a professional property manager will not invest in small stuff.
Josse is right again—go big or go home.
But… Mr. Solar is Wrong!
Here's the thing. Any suggestion that a newbie who can't tell a rafter from a footer, who's never signed a lease, who's never qualified for a loan, who's never experienced the joys of eviction, and who's never written a business plan much less executed it should stick his/her nose into the big stuff is insane at best, criminally misleading at worst, and big-time guru on balance.
It’s not like you know anything about solar. It’s not like you can raise $5M from partners. And, most importantly, it’s not like you know what a good deal looks like.
And something else you don’t know is how much mistakes in real estate hurt!
So, What Should You Do?
I have no idea. I don’t write articles to give you answers. I write to make you think. And all I can tell you is what I did and what my friends did. You figure it out from there.
I can tell you that I learned from making mistakes. I could not conceptualize large solar projects any other way than growing into them. But I eventually arrived at a point in my intellectual worth that now enables me to play in the big leagues. I still have a portfolio of small equit, but likely not for too much longer because I'll invest more with my home refinance.
My partner Jhon is a CPA with a Deloitte pedigree, who can see stories in numbers that 99 percent of people just aren’t able to see. Aside for syndicating with me, he seems to always have two flips going on. And now, he is starting to teach as well since we are doing a live event in Phoenix in January.
Tom, aside for being a hugely successful realtor to the investors, is continuing to stick to his model of buying extremely well-located small solar farms in Northern Jersey, close to transit and with the eyesight of Manhattan. He is of the mind that fewer panels equal more cash flow. Works for him!
Brandon Turner makes good cash flow on his portfolio, buys solar farm equity, and writes books that generate very good residual income.
Both Jhon and Brandon invest with me for diversification and access to other markets—and for the fact that both of them are kind of maxed out with how much they do, and it’s time to diversify into more passive forms of cash flow.
You see, everyone has angles. Everyone is diversified with activities and revenue. Whether it’s classical training or trial and error, all of us study and learn. One thing none of us did was jump into large multifamily right away.