The biggest advantage to investing in real estate is definitely the leverage. There are few other asset types where it is so common, easy, and acceptable to borrow so much (or all!) of the money to purchase the asset. What’s the second, you may ask? It is absolutely the size. Just to buy a lot in a desirable area can cost many times the entire retirement savings of a median American family. This may seem like a major issue, after all, who wants to pay more for anything? But to well-educated and resourceful people, and especially to people who have a thorough understanding of the first advantage of real estate investing, more expensive deals are much more help than a hindrance.
There are three main advantages to the savvy investor or working on larger deals, and all of three of them get better the larger the deal is:
Let’s start with the better use of your time. Imagine you’re selling pencils for a nickel each. On each pencil, you earn a penny of commission (20%, that’s good commission!). You also have a friend who would pay you $14/hr to process paperwork for his company. That’s a sure job because there’s always more paperwork. In order to make more money selling pencils, you’d need to sell over 1400 pencils per hour, 11,200 pencils per day, or 2,800,000 pencils per year. It is definitely possible to sell 2,800,000 pencils a year, but you’d better not do it one at a time! Now suppose you were selling real estate, valued at $500,000 per property. You get a commission of 3% for each one you sell, which is normal, and equal to $15,000 per property. Now if you want to make more money than you would at your friend’s paper-pushing job, you just need to sell two properties in the whole year!
What about your team? Do you think that they’d appreciate working on larger projects? You bet! Let’s stick with the example of the realtor’s commission. Selling a $3,000,000 property is only a little bit more work than selling a $500,000 property, but is 3% of $3,000,000 only a little bit more than 3% of $500,000? No, sir! It’s six times as much! “Hold on” I hear you saying, why would I pay my realtor six times as much for only a little bit more work? Good point… Why don’t you ask them if they’d be willing to do the job for “only” three times as much? You can negotiate yourself a nice 50% discount and your realtor will still likely be very happy with you because they’re STILL earning three times what they would be working on the smaller property! If you were a real estate agent, do you think you could do a little bit more, and maybe a little better job for someone willing to pay you three times as much?
Finally, there’s the competition. There is probably nothing that has prevented more people from investing in real estate than the thought “Oh, that’s too expensive for me”. Even after I’d done a couple deals as a real estate investor, I’d still run into opportunities in the market and just remove myself from the game. “$800,000? There’s no way I can afford that!”, “$2,200,000? Absolutely not!” I didn’t realize that I was completely missing the point. Good real estate investing isn’t about price, it’s about value, but there are many, many, people, of whom I used to be one, that doesn’t understand how to raise money or are afraid to borrow, and for them it’s completely reasonable that they not bother bidding on properties that will definitely not sell for what they can pay for themselves. What that means for the savvy investor is that there are far fewer other people bidding for the higher priced properties that they might want. When competition is scarce, making offers is less about paying more than the other prospective buyers than it is about understanding and adequately meeting the seller’s needs.
Bigger is better my friends, and even bigger is even better, so start working on your ideas to tackle those projects that used to make your heart flutter in fear when you thought about them. Once you have a plan to get the money, get out there and make the good stuff happen!