10 Ways to Scale Your
Multifamily Portfolio

Table of Contents

Introduction

Investing in multifamily real estate is a great way to earn steady, passive income. Some people start slowly—buying one small apartment building at a time. Maybe a real estate investor buys a duplex first, followed by a four-unit apartment. Scaling that real estate portfolio can be challenging, but it’s possible with the right plan in place.

In this article, we look at 10 ways to scale your multifamily portfolio.

1. Develop your investment strategy

Before you try to scale, be sure you have crafted your investment thesis. After all, there are many ways to invest in rental property.

Some people buy apartment buildings for cash flow; others are focused on appreciation. Some prefer to be active investors, whereas others want to be entirely hands-off. There are some who prefer to be long-term buy-and-hold investors. Others want to make value-add improvements and then upon stabilization, sell.

Regardless of your investment approach, it is important that you have developed a thoughtful approach. Otherwise, you’ll be scaling investments in too many different directions. Acquisitions that do not align with your strategy may tempt you.

Importantly, having an investment strategy allows you to develop a financing plan for the growth of your portfolio. Thoughtful financing is important. Otherwise, you may end up over-levered as you try to grow your portfolio too quickly or with risky deals.

2. Owner-occupy your first multifamily investment

Someone who is just getting started should consider owner occupying a small apartment building. This is sometimes referred to as “house hacking”.

The primary benefit of this approach is that it allows you to obtain highly attractive, owner-occupied financing. You can usually lock in debt that is 100+ basis points less than standard commercial financing. To qualify, you’ll need to owner occupy an apartment building with fewer than five units.

An added benefit of owner-occupying your first multifamily investment is that it allows you to self-manage the property. This is a great crash course on property management. Even if you hand off management duties in the future. You’ll have a basic understanding of what it takes to deal with tenants and other operational/maintenance issues.

3. Consider utilizing the BRRRR investment strategy

The “buy, renovate, rent, refinance, repeat” or BRRRR strategy is another great way to grow your portfolio.

The reason this is so appealing is that, upon property stabilization, the owner can do a cash-out refinance. Leveraging this equity is a way to access the capital needed for your next acquisition.

See, all too often, the biggest hurdle to scaling a portfolio access to equity. Most lenders require you to invest at least 25% equity. The best practice is to invest closer to 30-40% equity. Lowering the loan-to-value (LTV) ratio helps reduce the investment risk.

The BRRRR method can provide the capital needed to make follow-on equity investments. Furthermore, allowing you to scale your multifamily portfolio.

4. Use leverage (but carefully)

Most people use some combination of debt and equity to buy their real estate investments. Otherwise, very few people would be able to afford multifamily properties.

Leverage essentially uses borrowed money to amplify cash-on-cash returns. Eventually, mortgages are paid down and then the owners benefit from ongoing cash flow.

However, investors need to use leverage carefully. While it can boost returns, it can also magnify losses.

Let’s say an asset loses 20 percent of its value during a downturn. Someone who owns the property outright (i.e., no leverage) only loses 20 percent of invested equity. Someone with 70 percent leverage would lose two-thirds of invested equity – a staggering number, especially for otherwise conservative investors. Any further drop in property value could result in the owners losing all of their equity.

You should use low-cost, long-term debt whenever possible. Multifamily investors should also explore loans that offer an interest-only period. This reduces the initial payments while the team works to make property improvements after acquisition.

5. Staff up or outsource some tasks to third-party providers

One of the biggest obstacles to scaling your multifamily portfolio is trying to do all of the work yourself. Finding, doing due diligence, renovating, renting, responding to repair and maintenance requests, arranging financing.

This is all very possible when you’re dealing with your first or second deal. But in order to scale, you need to give up some degree of control.

Typically, someone who owns 50+ apartments will start to have the scale needed to outsource major functions. For example, you can probably have a dedicated property manager and leasing agent. You should probably have a team of maintenance techs at the ready who can quickly repair things. As you scale, you simply cannot do all of the work yourself.

Instead, focus on the tasks that you enjoy most. Grow your management team or outsource the rest. Teach the others what they need to do to run things smoothly. Operationalize your policies and processes and then entrust others to execute on your behalf.

6. Utilize 1031 exchanges to grow your apartment portfolio

We often talk about real estate being a highly tax advantaged industry. One of the tax-savings tools investors use to grow their portfolios is the 1031 exchange.

A 1031 exchange allows you to defer paying capital gains taxes on the sale of a property. This is if those proceeds are reinvested into another like-kind investment opportunity.

One condition is that the asset has to be of greater value. Therefore, an investor might sell a 20-unit apartment building and “trade up” into a 50-unit apartment building. This allows them to grow their property portfolio faster than they would be able to if they needed to pay capital gains on every asset they sold.

7. Grow your network to source off-market deals

Another obstacle to scaling portfolio is deal flow. Finding multifamily apartments for sale can be challenging—especially with so much capital chasing the same types of deals. In addition to working with real estate agents, work on growing your network to find off-market deals.

There is no doubt that you can source off-market deals for yourself. However, with limited time, the more eyes out there looking for you, the faster you’ll be able to scale.

8. Consider investing in alternative markets

People often get hung up on finding deals in the same area they’ve already invested. While this can make sense (i.e., less management intensive, local economies of scale, etc.), it can also be limiting.

For example, in some markets, there are simply very few multifamily assets that trade. In other markets, sky-high prices make those that do unaffordable.

Those who want to expand their total units under management may instead want to look elsewhere. Look where others aren’t—in unconventional markets where there is significant untapped opportunity. This might be outer-urban areas or even well-positioned suburban markets.

9. Be able to underwrite deals quickly and accurately

Many multifamily investors fall victim to “analysis paralysis”. They spend a lot of time thinking, rethinking, and re-analyzing deals that they never move forward. By the time they decide to move forward with a deal, the property is already under agreement by someone else.

This is why it’s important to have a solid underwriting process in place. Being able to analyze deals quickly will help you to scale your portfolio.

10. Invest in an apartment syndication

Those who want to be truly passive investors will want to consider investing in an apartment syndication. A syndication is generally spearheaded by a sponsor, or “general partner,” who oversees the deal on behalf of “limited partners”.

With this approach, you can own a fractional share of a larger apartment community. You only need a fraction of the equity that you’d need if buying independently. This is because others are investing in equity as well. It also allows you to access bigger deals than you might be able to do personally.

Why does scale matter?

Growing your multifamily portfolio is a great way to build multigenerational wealth. Not only does it provide multiple income streams, but it also comes with tremendous tax benefits.

Tax benefits, like depreciation, can save investors tens of thousands of dollars per year. Each time you buy a new property, that property can be depreciated.

Once that depreciation is gone, many investors will actively pursue buying another property just to have something else to depreciate. Depreciation can be used to offset income earned. This is where the savings from one property can be applied across an entire rental portfolio.

Conclusion

While the scale is important, it is equally important to scale sustainably. If the growth is too fast this can result in an investor’s downfall. You need to have the proper team and systems in place to manage your growth. It’s OK to go outside of your comfort zone, but you should continue within your zone of ability.

Are you looking to grow your multifamily investment portfolio? Contact us today to learn how the Smartland platform can help you achieve scale today.