That statement sounds hard to believe doesn’t it? The bigger the property, the easier it is to get the money for it. How could that be possible?

Having been investing in multi-family houses for over ten years now, I can tell you that it is actually easier to buy and own a hundred unit complex than it is to own a ten unit building.

There are several reasons why this is true. The first being the financing, lenders are not paid a flat rate for lending on properties, lenders are usually paid based on a percentage of the loan amount. Let’s say they earn a profit of 2% of the loan amount.

That means they will earn $20,000 on a $1,000,000 deal and $200,000 on a $10,000,000 deal. In order to close on these two loans the bank has to do the same amount of paperwork and the same amount of due diligence to determine if they are going to lend on the property, the only thing that is different is it will take longer to do the property inspection.

The bank has the same amount of over head. They don’t have to hire any more people to crunch bigger numbers.

If it takes the same amount of work and the costs of doing the deal are the same, yet they make a whole lot more money on the bigger deals, can you see why it’s easier to get the money on the bigger deals? You have far more lenders that are eager to do business with you!

There are very few national lenders who specialize in smaller deals between $500,000 and $3,000,000. If you are just starting out and you need financing in this range, your best bet is to go to the local commercial bank in the market that you are buying in. The local banks have the advantage of wanting to do the smaller deals and also being more flexible and creative when it comes to the financing.

The other benefit of doing business with the local lenders is they are usually familiar with the property that you are buying and can tell you about the history of the property and will let you know if you are buying it at the right price.

I once had a local lender tell me that a 60 unit complex that I was about to buy had different colored roofs about a year ago (painting is a cheap way to disguise deferred maintenance!)*

The same large/small scenario holds true for you as well. You as the borrower have to put the together the same amount of information in the loan package for a small deal as you do a big deal. It takes the same amount of time to put the loan package together yet with the bigger deal, your going to get a lot more cash flow and a lot more appreciation when the market rises and a lot more principle pay down when those tenants pay your mortgage every month.

There is also economy of scales when it comes to the managing of the properties. Once you go over the 100 unit mark, you have enough income in the property to support a full functioning staff. It makes it easier to manage a property. A lot of the quality management companies won’t manage properties less than 100 units. Why?

Because management companies are paid based on a percentage of gross collected rents, the higher the number of tenants (units) the higher the potential for gross collected rents.

Let’s revisit the financing issue. The larger the property the easier it will be to obtain non-recourse financing. The difference between recourse financing and non-recourse financing is whether or not you are personally going to be on the hook for the loan amount.

With recourse financing, you will sign as a personal guarantor of the note. With non-recourse financing, you give no personal guarantee. The lenders recourse will be to take over the property. Most smaller deals have recourse financing. The bigger you go the easier to get non-recourse financing.

Non-recourse financing may sound good but it comes with a catch. There are usually stiff pre-payment penalties with non-recourse financing the average five years in length. The pre-payment penalties are called “defeasance” or “yield maintenance”. Sometimes they are so steep that they prohibit you from selling the property because the will take away all of your profit!

You’ll need to decide how long you are going to keep the property to determine what type of financing you will seek.

As an emerging market specialist, I’m usually in and out of an emerging market with in three to five years. Because of that, I’m willing to take a recourse loan more often than a non-recourse loan.

Of course, I have all of my other assets protected in layers of entity structures in case one of my recourse properties has a problem…hasn’t happen yet because every risk I take is a calculated risk and I buy based on cash flows and market demographics.

The faster you go big, the faster your going to become wealthy. I’m often asked, at what size should a beginning investor start investing at. The answer is to invest in whatever size you are comfortable and then start buying bigger properties from that point and don’t get stuck in a plateau.

I started investing in three to six unit properties and did that for the first three and one half years of my investing career. I didn’t buy anything bigger because I was afraid to.

Though the more and more I educated myself and the more deals I did, the more comfortable I got to take the next step, when I finally took that next step I bought a forty unit complex. And before I knew it I bought a one hundred unit complex, then a three hundred and fifty unit complex (I currently own a couple of those and a 210 unit property) and I’m currently negotiating on a 561 unit portfolio.

It really is easier doing the bigger deals and not only do you have a much greater cash flow in each of those properties but, as I said earlier, you also have far greater appreciation in those properties.

Think how proud your going to feel when you show a picture of your 100 unit complex to your family, friends and “ex”-coworkers!