Size Matters when it comes to certain things…. sometimes bigger is better and sometimes smaller is better. When it comes to stock market and real estate investing, size matters a lot! The interesting thing is, it’s the opposite for stocks versus real estate.
When it comes to being a stock market investor, it is an advantage to be smaller. If you have a smaller number of shares, it is much easier to buy and sell positions. Warren Buffett has often been criticized for his “buy and hold” strategy, but the fact is, he doesn’t have a choice.
Whenever Mr. Buffett wants to buy stock in a certain company, he is often buying billions of dollars worth. It takes a long time to acquire that big of a position because of the number of shares that are trading might not be that large.
I once read that it takes large funds several months to exit certain positions because there aren’t enough buyers on the other end of the trade. So basically it takes investors who are dealing with large sums of money a long time to enter and exit a trade because of the large number of shares they own. A lot can happen to a stock’s price in the period of a few weeks or months. This is why Mr. Buffett and all the large funds who are handling billions must take a long term view. They simply cannot be traders who trade in and out of a stock.
So, if you are a small investor it is much easier to enter and exit a position. If some bad news comes out and you want to sell your shares of a publicly traded company, you can often do it in a matter of seconds. This is a huge advantage!
Real estate investing is the opposite though. With real estate, bigger is better. I am referring to owning rental property when I talk about real estate. With rental property you want to scale as soon as you can. The reason is simple, the more units you have and the more income you have coming in, the easier it is to handle expenses or losses on certain properties.
This week I was notified that one of my units needed a new air-conditioner and it would cost $2,500. There was a time when I would have panicked after hearing such news. Although it wasn’t great news, I really didn’t give it much thought. The reason is because I have plenty of other units with rent coming in to cover it. In fact, I’ll still make a profit this month on all my properties combined.
Here’s another thought, if you own a single family home as a rental and the tenant moves out, guess what- you just lost all your income! This is why I always say “two doors or more”.
The one thing I would caution you on, though, is the temptation to buy cheaper and less desirable properties all in the name of trying to scale. You need to scale, but you need to scale with good,cash-flowing properties!