Now, I realise that might be something of a leading question! But I’m talking about in terms of deal size. What size deal should you be working on? What size investment should you be thinking about making? Is there an ideal size of investment when you’re starting out or when you’re further along in your career?
That’s the question I’m going to be diving into here – should you go after the small, safe projects, or the big projects that could actually cost you loads of money if they went wrong?
Should you go after that tiny little project just so that you can kind of keep it 100% under your control and take 100% of the profit, or would you prefer to have 50% of a larger deal, or 20% of a really big deal? These are little things that we need to talk about today. So let’s dive in and ask… Does size matter?
Everybody has to start somewhere and so there’s absolutely nothing wrong with small, modestly-sized deals. Everybody starts off small: many people doing big projects (like myself) started out on these little deals, then you graduate and evolve over time. As your knowledge and confidence builds with each deal, that sense of overwhelm and fear of getting it wrong dissipates.
There are quite a few benefits to a small project. First of all, when you’re starting out you have a limited amount of knowledge and so going for a relatively straightforward deal is probably a wise and prudent move, primarily because you don’t want to be in a situation where you’re intimidated by everything.
There’s a lot to learn, so don’t bite off more than you can chew by jumping into something that involves a huge amount of additional complexity on top of what you already have to learn from scratch!
If you buy somewhere brand new and put a tenant in, it’s simple and easy, but doesn’t give you much room to add value. If you buy somewhere a little tatty that needs a small amount of work, it’s easier to sell it for more than you paid, without being a massive job.
So that’s my first tip: don’t go too simple… but be careful not to go too far and get into something that might require all sorts of additional work like structural alterations.
One of the downsides of doing small projects is that you have a lot of competition. There’s no barrier to entry when it comes to smaller deals: anybody who has money can afford to get into the market and so you’re going to be chasing after deals that have a lot of other buyers.
Smaller deals will build your confidence and help you understand the workings of the deal. At a size like that you’re looking at 100% control so any profit that you make goes straight back to you, plus you won’t have to argue or debate any design decisions, although having said that it’s never a bad thing to have somebody to kind of bounce ideas off and just make sure that you’re doing something right. You might be confident but remember it’s possible to regret a decision you’ve been a bit too hasty with!
Ultimately this is a rite of passage for most property investors: start with small deals and then over time you’re going to graduate to the bigger deals.
Once you go above a certain level of capital, your deals are going to step up to the next level. You might be looking at more expensive properties, but remember that 5x the cost of your first deal doesn’t necessarily mean 5x the complexity. It could be the exact same amount of work as the first deal, but in a more expensive area, so you may be now looking at getting a mortgage for quite a substantial sum.
This is the point at which you might start working with investors – people who are looking to put money into the deal with you, which could add some complexity. You might find as well that the properties will require more work. At this stage we’re talking about stepping up your renovation work and you might have to bring in an architect or a structural engineer to assist with some of the technical stuff that’s involved.
Of course, the actual complexity of the job may be very minimal and so it could just simply be that it’s the same as a smaller job just with bigger numbers attached!
If you are looking at any kind of structural alterations, this is the point at which you need to be a little bit careful. You’ll need to learn about safety regulations, insurance, and of course who you’re working with. You might be trying to do it on a shoestring budget, but if you’re not careful (and bring in the wrong people), there’s a huge potential for things to go wrong: legal obligations fall to the owner and ignorance is no defence when it comes to the law, so make sure you’re fully aware of what is required.
These are all little things that maybe not obvious to you if you’re starting out, and so this is what I mean by learning as you go and gradually understanding the system. Now, having mentioned legislation and regulations – all of this might be very overwhelming and so this is where it’s sometimes useful to bring in a strategic partner. Whilst in a year or two you’ll be doing this day in, day out, bringing in a level of expert experience that you don’t have can help to de-risk the deal to a degree.
Bringing in someone experienced, with the skills that you don’t have, can remove a lot of anxiety you might have about steaming into something that you’re completely new to. The other way to deal with a lack of expertise is to hire in professional help – it could be a project manager or an architect. Yes, it costs you a little bit of extra money but consider it an insurance policy to keep you out of trouble. Then next time, you’ll have picked up that bit of knowledge yourself.
Next comes the big, huge. Some of the stuff that I’ve worked on, we’re talking about onstruction projects that might be worth 50 million. Obviously those are very chunky deals with a lot of complexity, and a number of pros and cons.
First of all, understand that you’re going to lose a certain amount of control. If you are stepping up to these levels, the 100% that you owned of your first deal might turn into 5 or 10% (maybe a little more). Obviously, that’s a very small piece but you can still be the person who’s driving the project.
Remember though, you’ll have to share the rewards with a greater number of people, because most people don’t have anything like the amount of money required for deals of these sizes. You’re talking about lenders putting in significant sums of money, requiring huge professional teams to give them confidence that the project will be worked on properly.
You might have to pay out 1m in fees, but there’s all of those things that we talked about – health and safety compliance, legal requirements etc – are all covered.
There’s a huge amount of prestige around these high-level deals so high performance is expected. Obviously you need to graduate to that and it can take a number of years, but the economics of the deal can be phenomenal. There’s far less competition this level and so whereas you’re trying to beat off the competition to get into the small deals, with big deals you usually have almost no contest.
At that higher level obviously there’s a pretty considerable amount of knowledge and skill required to manage all the moving parts, and as with every deal the more you do, the easier they become. Eventually you’ll get to the size of large projects and it might take a while – in my case, I have a career that has been going for 30 years this year and so 30 years obviously is a long time to build up all of that, but as I always say – you should always be looking to be in this for the long haul!
I go into this topic in far more detail in Episode 146 of the podcast, so if you’d like to hear more, give it a listen.