Whether you’re trying to establish diversity for your investment portfolio, or want to transition out of your current career and build your real estate business, multifamily real estate is the safest way to create genuine wealth. And economies of scale is a clear instance of the power of concentrating your efforts to obtain a more profitable result.
Investopedia defines economies of scale in the following way: “Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the amount of a good produced, the lower the per-unit fixed cost because these costs are spread out over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies.”
The cost to build apartments or other multi-family projects is smaller because of savings to build common walls, roofs and other savings that come from building multiple units in one place. In many cases, apartment units can be constructed for one-third less per square foot than single-family homes of similar size.
Below we have compiled a list of specific ways in which economies of scale can make your real estate investment portfolio more profitable:
Cheaper Maintenance and Repairs: While single-family unit investor-owners may leave the everyday landscaping and minor maintenance up to the tenant, they'll still get the calls when something breaks. An owner can often negotiate better repair and service rates with property management companies who have only one location to service.
Protection From High Vacancy Rates: Marketing multiple units in one location can many times get a vacancy filled faster than advertising a home. There is also the ability to offer current tenants incentives to recommend the units to their friends, which can build a waiting list for units. Less time unoccupied means less of a ding on profits.
Savings on Purchase Price: It's almost always possible to buy several individual apartment units for a lower per/unit price than buying one unit. Carrying it further, the larger the building the greater the savings as well. Carry this concept over to multi-family projects versus spread out single-family rental homes, and you'll find further savings.
Affordable Property Management and Security: Just keeping an eye on multiple single-family rental homes requires travel, no matter how close or far apart they may be. Grouping multiple units in one location reduces headaches and travel. Security costs are lower as well if security is hired or systems set up for the properties. Installing security systems in one spot may result in a discount.
Lenders Evaluate Them Differently: Lenders look at apartment buildings as a business, so buildings are not evaluated only on market value, but also on how you are running it. This includes what its NOI (net operating income) is, and whether it might yield a greater potential return. This is why having a professional property management company to run things is essential. Lenders will factor in your management team when evaluating the NOI.
There are many places where costs can be lessened when purchasing, managing and maintaining multiple rental units in one location, rather than buying single units spread across a large area. So, it would be wise for investors thinking of buying another single family rental home to think of selling the ones they currently own and concentrating their investment on multiple units in one location.
Looking to hire a licensed property management company?
Braden Equities Inc. has been successfully managing multifamily properties in Edmonton since the 1970s. A lot has changed since then, but our commitment to the residents living in each building we operate has not. Contact us today.
Thank you for reading our blog. What are your thoughts on the importance of scaling to increase the profitability of your real estate investment portfolio? Please leave your comments or questions below.