Lets talk about Grant Cardone and why I don’t buy 16+ unit properties

What's up you guys? It's Graham here. So, I'm not gonna lie. One of the most common questions I've been asked on my channel is, "Why aren't you buying 16 units or more? Grant Cardone says you should buy 16 units. Why are you going against Grant Cardone?"

Oddly enough, like, usually these comments come from people who have never invested in real estate in their life, but who see Grant Cardone and how successful he is and how he only buys 16 units or more. They think, like, "Oh, that must apply to everything." So, I'm making this video just to address those comments and give my thoughts, because I have to say, I have massive respect for Grant Cardone.

Me, compared to Grant Cardone, I'm like, I am a very small fish compared to the behemoth that is Grant Cardone and all he's done and all of his successes. Like, I am a really small fish compared to that guy, and you can't argue with his success. But at the same time, I had my reasons for doing what I do just as he does doing what he does. So, I'm not so much here to disagree with Grant Cardone, but instead just give my thoughts on why I'm doing what I'm doing.

And maybe I can shed some light on this little disagreement thing about why he buys 16 units or more and why I'm not doing that. Let me first start by explaining what Grant Cardone says. I just want to make a very blanket statement here that there's not really an end-all be-all, 100% tried and true method to investing in real estate that's correct in like a hundred percent of the time. There are so many exceptions depending on the situation that could make one method better than another, one method worse than another.

So, I just want to say that even though Grant Cardone says this, it isn't necessarily true in 100 percent of the situations. So, we first start by explaining what Grant Cardone says. He says you should invest in a minimum of 16 units at a time. The reasoning behind this honestly is pretty logical. So, instead of having one tenant with one unit paying you 100 percent of your rent, you have 16 tenants who pay 100 percent of your rent.

So basically, if you have one or two tenants that aren't paying you the rent, that's okay. Because that means you have at minimum 14 or 15 other tenants that are all paying you the rent on time. So, it's not like you're gonna lose 100 percent of your income if your one tenant in your one unit doesn't decide to pay you.

And on top of that, if you have one unit, one tenant, you have expenses like a mortgage or property taxes, repairs, insurance. Those aren't going away. I mean, those are there whether your tenant pays you or not. So, on the surface, it does make sense that the more tenants you have, the less risk you have from one tenant not paying and that screwing everything up.

You also have what's called the economy of scale, which means you have one building, with one roof, with one foundation. So, instead of fixing sixteen different roofs, you have one big roof to fix. Instead of fixing sixteen different foundations, you have one big foundation to fix.

So, in this sense, with the economy of scale, generally it's a lot easier to fix one thing than sixteen things sixteen different times. A lot. Let's be real here. That makes sense; a lot of truth behind that, and there's a lot of truth to the economy of scale situation. But it doesn't necessarily mean that this method is gonna make you the most money. It also doesn't mean that this is gonna take more time to manage.

Now, on that topic, Grant also says with sixteen units, you can afford to hire a manager. And again, I don't disagree with that. Chances are, with sixteen units, you can give one unit to a manager that will handle pretty much any situation of the building. So, with that, I don't disagree with that, because that is a very true statement.

So, let me address these points and give my thoughts on this, because he's not necessarily wrong. In fact, a lot of what he says I don't disagree with at all. But I'm gonna share my reasoning behind doing what I'm doing, which a lot of it is against what Grant does. So, let's first start with a vacancy example where he says, instead of having one tenant pay you 100 percent of the rents, you have 16 tenants that are all paying you 100 percent of the rent.

So again, I don't disagree with this; it's entirely true. The more tenants you have, the less risk you have of one tenant unpaid and you losing 100 percent of your income. However, my only counter-argument to this is that from what I've seen, vacancy rates from houses to apartment buildings are all pretty much the same. All the vacancy rates, from what I've seen, pretty much hovering around fifteen percent.

And it doesn't matter if you have a house; it doesn't matter if you have an apartment, condo, anything. From what I've found personally—and this is me dealing with rental properties myself and dealing with clients' rental properties as well—from what I've seen, vacancy rates always tend to hover around 15 percent on average.

And by the way, that whole 15 percent thing does not apply if you're doing like Airbnb or college rentals. So just exclude those two little subjects from what I'm talking about here. So anyway, going back to it, while yes, you can lose 100% of your income if you have one tenant in one unit, chances are if you have 16 units, using 15 percent of that on average, one to two of those is gonna be vacant at any given time.

So overall, it tends to average out in terms of your vacancy rate. But I agree in terms of losing 100 percent of your income; sure. But at the same time, having so many units, chances are one to two of those is going to be vacant at any given time. Now, of course, there are gonna be exceptions to this. You could be rented for a very long time without having any vacancies. Same with the house. I've had tenants that have been there for like five years now and had a single vacancy.

Now I'm telling you, on average, same thing like with an apartment building. You could be fully occupied for years at a time, and then all of a sudden, like, five people move out at the same time. Same thing with a house; it could be occupied for like five or six years, then all of a sudden your tenant moves out and it takes you like six months to re-rent it. So all of these situations are possible.

But I'm talking about the average here of being about 15 percent. Now again, with Grant's point, I completely agree, it's not like you're gonna lose 100 percent of your income with 16 units because all 16 tenants leave at the same time; chance of that happening is pretty much slim to none. So, in terms of risk of losing 100 percent of your income for a time, yeah, I have to give it to Grant. The chance of that happening for sixteen units is pretty much non-existent.

Whereas if you have a house, yes, if your one tenant leaves your one unit, obviously you lose 100 percent of your rent. So with that said, I don't disagree with Grant. But at the same time, with vacancy rates pretty much hovering around 15 percent, you're not gonna see a huge difference in terms of having one occupied a little bit more than the other.

And I also totally agree about not putting all of your eggs in one basket. And by eggs, I mean tenant, and with basket, I mean a house. I get it that you don't want one tenant paying 100 percent of your rents.

And I'm gonna read for you now what Grant Cardone said on this matter, word for word. He says, "When I was in Houston, I tried the investment housing thing. My renter left and I had trouble finding the place again. If you have a building with 16 units, even if a couple are vacant, you can still make it work. The more doors, the better."

Okay, so with that statement, I certainly sympathize with that, because that sucks. There's nothing worse than investing in a place and not being able to rent it out. It all depends on the strength of the rental market. For me personally, I have rented places always within one to two weeks of putting it online.

And usually where I advertise it is on Craigslist, and from what I found, unless you're asking way too much money for a place, it should not take you longer than one to two weeks to fill a vacancy. I have never once had an issue filling a vacancy with really good pictures and pricing it where it should be.

Now keep in mind I'm in Los Angeles with a really strong demand for rental properties. And by the way, this whole renting within a week or two thing has been consistent for me from 2011, which has been one of the worst housing markets I think we've all seen in a very long time, as it is today in 2017, which is probably one of the best housing markets.

So from what I found, as long as you price a property appropriately and use good pictures and pick up your phone and show it any time a tenant wants to see it, there should be no reason you can't fill that vacancy within one to two weeks.

And Grant, if you happen to be watching this, just know I have massive respect for you. I really enjoy your videos. I think I learn a lot of knowledge from what you have to say. But I also feel that if the property was maybe in a more desirable location, you wouldn't have had such an issue renting it out.

So again, just to repeat myself for the millionth time, whether you had less than four units or more than 16 units, from what I found, vacancy rates all stay about the same. So it doesn't really affect the return of a property by saying that one, you're gonna have less vacancy than the other. The only difference from what I see is that you have more tenants paying you a smaller amount, but that doesn't really affect the return of the property.

So now let's discuss the argument of economies of scale. And again, this is a very valid one. To repeat myself, you have one building, one roof, one foundation, one place for all the contractors to go to. Not gonna lie, it definitely simplifies things. Just a quick disclosure here, because I don't want to mislead anybody, but I don't have any properties that are larger than 16 units.

However, I've helped manage a few of these for clients of mine, when I first started real estate, who had massive, like twenty, thirty, forty unit buildings that I would help rent down. What I found in these is that you generally have much higher expenses than you would on a smaller single-family house or a smaller multifamily place of like two to four units.

Now, instead of having one house, one toilet, one kitchen, one tenant, one place for things to break, you know, I have 16 units, 16 places to lease out, 16 tenants to deal with, 16 kitchens to deal with, 16 points to deal with, 16 different things they can all break versus just one thing with a house.

And the cost to repair one toilet in one house is the exact same to replace one toilet in one apartment building, except maybe the tenant's paying 1/6 or 1/8 of what the tenant's paying who is in the house. I mean, just the cost to repair things is pretty much the same whether the tenant's paying you $400 a month or $4,000 per month.

But I don't disagree that, yes, you have one roof, one foundation, a lot of shared things, where you have one manager on site who can hopefully fix a lot of the issues that come up. With that, you generally just get more expenses.

And again, to repeat myself, the cost of fixing a leaky sink for a $5,000 per month tenant is the exact same cost as it is for a tenant who's paying $500 per month. And also the work to rent out 16 units is the same as renting out one unit, except on the one unit you can ask a lot more money for.

For 16 units, chances are you're getting a lot less rent. So you're putting in the same amount of work for less rent versus renting out a larger place that you get more money per month with the same amount of work. So, in the end, for what I see, it all tends to be about the same.

So, while I totally agree that it simplifies things to have one building, one place to manage, one place to go to, and while apartment buildings generally make a little bit more money to compensate for the added expense that you're gonna have to go through, it doesn't necessarily mean 100% of the time that that building is gonna make you more money than a property that's like two, three, or four units.

And yes, while a manager would certainly help with the amount of time it takes to manage, it needs to be factored in your return just it's the same way on a single-family residence or something that's two to four units. Now for Grant, I totally understand why he prefers 16-plus units, especially when he's buying 10, 20, 30 million-dollar buildings.

It would be a nightmare coordinating to buy like a hundred houses and rent out like a hundred different places scattered all around the city. In the high end, when you're buying like five million plus, it certainly simplifies things to buy more units. And that just makes things so much easier because if you're gonna sell one of those buildings and 1031 exchange it to defer your taxes into something else, it seriously would be a nightmare.

I can't even imagine the time and coordination it would take to sell off like fifty or a hundred different homes all around the same time and use that money to funnel in something else. It just wouldn't be practical. So I totally get why Grant Cardone in the larger price ranges prefers to invest in much larger buildings. It's like that makes sense.

And if I were buying 10 million-dollar buildings, I would be doing the same thing. So if anybody here is buying like 5 million and over, chances are you should go the multifamily route and you're wasting your time spreading that like 5, 10 million dollars out over buying like 10 little smaller deals.

So I agree with that; that makes a hundred percent sense. So what I've discovered from all of this is that it really just depends on what your return is and how much money you make from one building over another. It's just money, and it just depends on what's gonna make you the most money for your investment.

For what I've seen, they all tend to make about the same. Like, an apartment building in a good area of Los Angeles is always gonna be returning between three and six percent. That's pretty much across the board, depending on its location. It's gonna be very difficult to find something that's higher than a six percent return unless you get something that needs a lot of work, fix it up, you rent it out with higher rents and you increase your return.

But that argument is exactly the same from what I do with either single-family homes or small multifamily homes. I buy them, I renovate them, I fix them up, and I re-rent them out at higher prices. So it's the same; it's the same thing. And guess what? These smaller two to four units are all selling about the same return.

They're all about three to six percent in Los Angeles. So it's not like an apartment building will get you like eight percent return, where like a smaller multifamily will get you like four percent return. It just doesn't happen. For the most part, they all trade about the same amount of return. Therefore, the money you invest always is gonna get you about the same.

So unless you're spending like five or ten million dollars on this, at the end of the day, it's really just about what makes you the most money and where you get the most value. Now, for me in Los Angeles, because prices are just absolutely crazy, and because I'm not spending five or ten million dollars for units, where I found the most value between the 700,000 and million dollar mark is buying units that need work, that are under four units, fixing them up and renting them out.

And that for me is where I've gotten the highest return. And I've actually gotten higher returns from other clients who own 16, 17, 18, 20 plus units than I've gotten with high returns from them in something that's like three units. So it all just entirely depends on the deal and what you find and where you get the most value.

So, if you find something that's like 20 units and makes you way more money than like a four unit, by all means, go for it. But if you find a really good deal, it's like two, three, four units that you know you can add a lot of value to, that you can increase the rent, so you can fix it up, you can make it really nice and that's gonna get you a higher return, then obviously it makes sense just to go with the smaller place.

It's gonna give you a higher return. And again, because I'm not buying in like the five to ten million dollar price point here in Los Angeles, which is really what it would take if you want that many units in a good location, it makes more sense for me right now to buy smaller units that are lowering price that can bring me maybe a slightly higher return depending on the deal.

I also really like this method, because I'd rather have fewer very high-paying tenants than a lot of smaller-paying tenants. For instance, I would much rather have a tenant paying me $4,500 per month than like a whole bunch of tenants all paying me $450 per month.

And instead of spending $40,000 per unit, I'll spend $400,000 per unit. Now for me as well, being a smaller time landlord with higher-paying tenants has been a lot easier for me to manage. I also have a contractor on call who pretty much fields any problems that come up or anything that needs fixing. They call him directly instead of calling me.

He goes out there, I trust him, he fixes anything that happens, and then sends me the bill for it. And he's been someone I'm working with for a very long time who's been amazing. He's been a lifesaver, and this is who I used to pretty much manage it. Except I don't pay him a percentage; I pay him by the hour for anything that comes up, and that for me is working really, really well.

But of course, there are downsides to doing what I'm doing. And the biggest downside I see is that if I wanted to sell all of my places and I got five of them, I want to sell all five places and buy something larger, it is a pain in the ass to go and list five places, try to sell them all around the same time, to do a 1031 exchange, to defer my taxes and buy one larger building.

Again, that's gonna be a coordination nightmare. And finding buyers in a small time frame to buy all five of my places, to close all around the same time, to all buy something else, it's a lot bigger. I'll give it to Grant; I mean, that is really difficult to do. So from that standpoint, that's definitely the biggest downside to see.

If I want to sell all my places and put all that money in one big building, it's gonna be really hard for me to do, and it's gonna take a lot of time. Versus if I just put all my eggs in one big apartment building, if I want to sell that it's gonna be a lot easier. So anyway, to sum things up, I don't disagree with Grant at all, because there are certainly a lot of very good advantages to what he says.

And by no means is he wrong with anything that he says. So, I definitely see a lot of benefit in everything he talked about; I definitely see the upsides. But it's not the end-all be-all, like, blanket statement, like this is the only way to invest in real estate, because frankly, there are so many ways to make money in real estate, and there's not like one size fits all for everybody.

So, I hope that explains why for me, I'm investing in smaller multifamily places than buying something that's 16, 20-plus units. For me, I make more money in Los Angeles buying smaller multifamily places than I would buying larger places. And not only that, but since I'm not in like a 5 to 10 million dollar price point, which is what I would need to get in Los Angeles, because I'm not in that price point, it makes more sense for me at this time in my life to find smaller multifamily places where I get higher-paying tenants versus a large apartment building where I get lower-paying tenants, but more of them.

It just comes down to personal preference and what brings you the highest return for your money. So, as always, you guys, thank you so much for watching. I really appreciate it. I hope you enjoyed this. If you haven't already, click Subscribe. I'm doing my best to upload as much as I can; I know I've been kind of busy lately, but I'm gonna try to get out as many videos as I can.

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