Single family in the middle of multifamiily - Good or bad

8 Replies

I am working on closing a Single Family Residence (SFR), I am getting a decent enough deal and numbers work even for a conservative rent value. I am paying about 10% below average for the area probably because this property is in a block where on one side are duplexes other side is another single family, dead end and a nice park, opposite side is full of 6-8 unit multifamily rentals. In fact this property is a stone throw away from one of my other investment property that I have had for little less than two year and working out great. This is a B+ suburb of Milwaukee, with good schools and low crime.

My questions are

1) Will there be a decrease in rent due to the location of this SFR other factors being equal?

2) Will there be a problem getting rid of this home if want to, is there a standard percentage cut in home value that makes sense for this situation?

Thanks for reading my post.

The home will be worth less due to the fact that the primary buyer will be a investor, like yourself, as opposed to a home buyer. This property is destined to likely be a rental and priced accordingly. "Accordingly" means that the home will need to be evaluated solely based on rental income in my opinion. I would assess it's value based on a similar size/similar rent as a duplex or other rental in the area. Cap rate.

If I were buying I would not give any credence to it being a SFH because the base "home buyer" mentality simply will not exist and therefor not generate the higher prices emotional home buyers bring to a SFH..

The answer is-it depends. If the property is higher end you will probably have a harder time finding well qualified renters willing to pay top dollar. 

Purchase price of 10% below average sounds about right for the resale potential. Most Buyers get a little scared of potential problems with multi family buildings across the street. (traffic, noise etc..)

@Ranga Ramanathan  I'm guessing that the multifamily is a well-maintained building. If so you will be ok with rents. You will have to discount the property on top of whatever the discount amount is for that area. I'm thinking 15% - 20% discount (plan for that). 

@Ranga Ramanathan I'm sorry for the confusion, I'm speaking of the sale price on the exit. People will pay the rent to be in the single family house in a good school district where there are not many options because of family size, privacy, etc. When it comes to actually purchasing their home people are extremely picky; I see it now even in a seller's market. So when it is time to sale you will have to discount the property above the really market discount for that area. I have attached  Waukesha's Market update so you can see what that is at the moment. I hope this helps. 

Best of Luck

An SFR, being purchase for OOC or a rental, is evaluated using Comps. When it comes time to sell, you have no control over the intended usage of the buyer and it's still all cash or a conventional loan, again evaluated by Comps.

"The home will be worth less due to the fact that the primary buyer will be a investor, like yourself, as opposed to a home buyer" is an unreasonable statement - - even a war-zone property has value.

It is possible to use the Economic Evaluation (ie based upon NOI), but as a commercial loan has about +0.75 higher rate, that typically doesn't apply. Even the 2-4 multifamily does not always use the EE, whereas the 5+ always does.

Your rationale on location, condition and desirability is correct and if the numbers work for you, go for it.

The ONLY downside in my mind might be the street appeal and parking.

@Jeff B. exactly my thought, the parking isn't bad the investment properties have plenty of parking. This maybe a home I hold forever, as long as I get cash flow I don't care much.

@Michael Henry great data on the Waukesha county, you are probably right about the percentage drop for SFR near multifamily, The home was listed for about 15% less than comparable home in 4 block surrounding and I paid 6% less than asking price so in total ~18% less than normal home and the owner is fixing about 2000$ worth of stuff. If the home fetches same rent as other SFRs I will make a killing in terms of cash flow, I accounted for 15% less rent in my calculations.

Also does having a big rent pool around house offer potential tenants when home is available for rent? It may be wishful thinking on my part.

Do you think any improvement outside the house like fencing or invisible fence etc for dogs will help attract potential renters for future buyers?

Thanks you guys have been great help.

@Ranga Ramanathan  I think you should not have any problem renting the place out. As I mentioned above,  there are still a lot of people looking for single family homes for rentals. There are not many available for rent in these areas so you should have any problems getting the tenant and rent amount that you were looking for.