Summary: There are numerous fears and mental barriers that keep new investors from purchasing their first rental property. “I don’t have the money,” “I only want to invest locally,” are just a few of the most common excuses. But what about the experienced real estate investor? Is it possible that they could have the same fears and mental barriers that keep them from investing in bigger and better opportunities, i.e., going after a 100+ apartment complex? For us, the answer is a resounding “yes!”

 

We have all heard the quote, “the journey of a thousand miles begins with one step.”

I think of this quote often as we help numerous investors get started in real estate investing.

For me, the quote means that you have to overcome the mental barriers and fears that are keeping you from getting started on your journey by taking action, even it’s the smallest step. When you are just getting started, the first purchase is infinitely harder than the second. I always tell people that once they take that first step, the second and the third are so much easier.

I always thought that this quote only applied to those who are just getting started in real estate. I’ve personally been investing in real estate since 2001, so it never crossed my mind that this could apply to someone who is further down the path in their investing. Until now.

Over the weekend, Leti and I attended an investing conference in Spokane, WA. The purpose of the conference was to introduce both new and experienced investors to the Spokane market.

At the conference, one speaker and more specifically, one slide caught my attention. The slide illustrated the sales progression of a 297 unit apartment complex in a suburb of Spokane.

In 2011, the property sold for $22.2 million. Two years later in 2013, it sold for $29 million. Five years after that in 2018, the same property sold for $41.3 million. In 7 years, the property went up in value by over $19 million.

Most of us (myself included) would look at this and think, “wow, that’s awesome…but that will never be me.”

We’ve even gone a step further and convinced ourselves that small multifamily units were superior to large apartment complexes. This is based on the superior returns (55% return on investment) we’ve been able to achieve with Supported Living, something you can’t do with large apartment complexes.

But the sad reality is that I knew in the back of my mind that this thinking was incorrect.

As the example above illustrates, the sheer scale of an apartment complex can result in life changing increases in value with even small increases in rents. For example, if you own a 100 unit property and increase the rents by $50 per unit, your annual revenue goes up by $60,000. If you assume a 6% cap rate, the value of the property goes up by $1 million.

Also, as you get larger, your costs can go down significantly. For example, as you get above 90 units, you can justify hiring an on-site property manager and significantly drive down your property management expense (sometimes as low as 2%).

After the weekend, I realized that many of the same mental barriers that keep people from purchasing their first property are the same barriers that kept me from even considering purchasing a 100+ unit apartment building.

The following are some of these barriers, and how they apply to both a new investor and an experienced one:

 

I’m not an expert

New investors often believe that you need to be an expert in order to be successful in real estate investing, and this often stops them from acting.

In our case, we read three books and then surrounded ourselves with good people. Within months of reading these books, we had purchased our first duplex. The rest of the learning came with experience as we bought three more properties that year.

Based on our experience and in talking with many experienced investors, you only have to become proficient and get that first purchase out of the way. By the end of that process, you will have learned so much that the second and third purchases feel infinitely easier.

When it comes to large apartment complexes, I realized that we constructed the same mental barrier. The thought of purchasing a >100 unit apartment complex is daunting. And one excuse we’ve been telling ourselves is we don’t have the knowledge or experience to pull it off. This is a poor excuse because we not only know how to acquire that knowledge, but we also know how to surround ourselves with the right people.

We did it when we first got started, and we can do it again.

 

The market is too competitive; I can’t find any deals

I hear this often from people who are buying their first deal. They can’t find anything, it’s too competitive.

This is a common mental barrier, and it keeps people from taking the necessary action to source deals. These people will sit back and wait for their agent to bring them a deal and do very little work themselves to find their own deals.

Rather than blame the lack of deals on a competitive market, you have to realize that all this means is you have to work harder and be more creative to find deals.

For example, if there are limited deals, you have to figure out a way to compel an agent to bring you a deal over another investor. Ultimately, it comes down to relationships. Think about the effort you’ve put in to build those relationships. Think about the time you’ve spent going to conferences or meetups to socialize with agents or wholesalers. If you haven’t put in the time to build those relationships, don’t expect agents or wholesalers to “gift” you a killer deal.

Also look at how much time and effort you’ve put into searching for deals on your own. How many hours a week do you actually spend on Redfin or Trulia looking for deals? If the answer is zero or less than five hours a week, you aren’t spending enough time.

Just this weekend at the conference, one of the attendees was looking for properties in Spokane and a new four-plex happened to just pop up. Within hours of the property showing up in Redfin, she had called the seller’s agent, drove by the property and put in an offer. Leti actually found the same property (because she spends many hours per week on these apps) but she was a few hours too late. By then, our friend had already taken the initiative.

Even in this market, good deals show up from time to time. You just have to put in the effort to find them and be creative and make deals start out “just OK” into great deals by finding hidden value or negotiating like a shark.

I’ve always feared large apartment complexes because of the same mental barrier.

I know that large hedge funds and institutional investors are after these large apartment complexes, so I’ve always told myself that there’s no way I can compete.

However, this is just an excuse.

There’s no reason why we can’t build the right relationships with brokers and get an inside track on one of these deals. There’s no reason we can’t learn to spot the hidden value in large apartment complexes just like a big wig professional investor. We just have to focus on building our knowledge and the right relationships to ensure that we have the inside track on all of the best deals and know how to recognize them when they come along.

 

Real estate is too risky

New investors worry about all of the things that can go wrong when you own an investment property. You could get sued; your property might not rent; a pipe could burst and cause severe water damage; you could have nightmare tenants. These fears keep new investors from ever buying their first property.

Investing is about mitigating your risks.

You form an LLC to limit your liability. You verify the demand for rentals in your market. You perform inspections of the house so you know the potential problem areas before you buy. You hire a reputable property management company who does a good job screening tenants so you have fewer nightmare tenants.

Each potential risk should be addressed and mitigated to ensure that you achieve your expected return. This is investing.

For me, it was a different type of risk that created a mental barrier and kept me from even considering large apartment complexes. It was less about all of the problems I would encounter when I owned larger commercial-sized rental properties because by this point, we’ve experienced and worked through a lot of issues with our smaller properties. For me it was more about portfolio risk. The bigger deals always felt more risky.

I personally like to have my bets spread out. I never wanted to have all my eggs in one basket. So the thought of selling all of our properties and putting all our funds into one 100+ apartment complex seemed too risky.

But the question is, why limit myself to one 100+ apartment complex? Why not aspire to buy two or three of these spread out in different geographical areas? How is that different from owning three duplexes in three different markets?

It isn’t.

It’s just a matter of scale and overcoming the mental barrier that I’ve created for myself. I just needed to think bigger.

 

I don’t have the money

I can’t tell you how often we hear this from new investors, and I would venture to guess that it’s the most common excuse we hear.

And let’s be clear, it’s just an excuse.

There are numerous ways to solve this problem. I’m going to just list a few:

• You can severely cut back on your spending (live like a resident) and save a large proportion of your salary
• You can do a BRRRR, which is essentially when you buy a property with no money down (we’ll cover this strategy in a future post)
• If you own a home, you can do a cash-out refinance or get a home equity line of credit
• You can liquidate your 401k (which is what we are planning to do, so we can afford to purchase a large apartment complex) or stop funding all your other “extra” retirement accounts like 403bs, back-door Roths, 529s
• You can search for deals that provide seller financing

How does this apply to our own situation?

Investing in a 100+ property can require a down payment of $3 million or more. Procuring this amount of money was daunting and therefore, caused us to never even consider large apartment complexes as a possibility. But at the end of the day, this is just an excuse.

Even if you don’t have that kind of cash right now, you can put in place a plan to build up to that level using 1031 exchanges. Why not start with a 25 unit building with the intent to 1031 exchange that into a 50 unit building and then into a 100 unit building? We did this on a small scale recently as we sold a duplex and 1031 exchanged it into 10 residential units plus a commercial space. There is no reason we can’t go bigger by doing sequential 1031 exchanges over the next several years.

Alternatively, why not pool money together with a very small group of investors and purchase a large property? While it’s not our preference to invest with others, the experience gained would not only make it easier to buy something bigger in the future, the investment itself might generate enough cash for a down payment for a larger complex that we could buy on our own. Finally, the potential knowledge we could gain by partnering with people who have more knowledge and experience in with large complexes, would prove invaluable.

The bottom line is that if we are advocating for others to find solutions for coming up with a $30,000 down payment, we should be able to figure out a way to come up with a $3 million down payment.

 

I only want to invest locally

This is probably the second most common excuse we hear from new investors.

We think it’s great to invest in your local market if you can, but oftentimes it doesn’t make financial sense. Many of us live in high cost of living markets, so it’s difficult to find a property that cashflows. As a result, we recommend that people start investing in out-of-state markets. Otherwise, you’ll spend your entire life looking and never purchase your first property.

While long-distance investing might have been an issue before the internet or video chats, it’s much less of an issue now. With the combination of technology, a good local team and perhaps occasionally flying in to check in on the property when necessary, there’s no reason why you can’t do just as good a job managing a property from afar as you would a property in your local neighborhood.

What is the mental barrier for us? While we are invested in three different markets, we’ve been hesitant to expand beyond those markets because we’ve developed familiarity with them, and we’ve spent significant time building great teams. In other words, we’ve become comfortable with those markets so expanding now would push us out of our comfort zone. We know that if we are  going to get several 100+ unit buildings, we are going to have to expand our search into other new markets because there is a much smaller number of large complexes out there compared to duplexes.

So just as we tell people to go where the deals are, we need to do the same.

 

Conclusion

Whether you are a first-time investor or much further along, you may be holding yourself back from taking that crucial first step.

This is the lesson we’ve learned, and we are taking our first (baby) steps toward purchasing a large 100+ unit apartment complex. This will require us to push through our fears and mental barriers and take action.

What about you? Are you ready to take that first step?

 

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