Apartments or Single Family if same cap rate?

Question

So, I've been looking at a 10 unit apartment complex and comparing it with Single Family Residence.  When I did the rough numbers on the complex& the SFR, both had the same cap rates.

The apartment has 10 units, so my question to you guys is would you rather buy the apartment with 10 units or one single family if both cap rates are the same?  Would you mine explaining to me why?

The Apartment is $400K, and the SFR is $100K

Thanks.

Will Barnard · Answer

If these are both in Las Vegas, I would suggest the SFR route and here is why: with cap rates being equal, the upside on the sfr's are greater than the apartment simply because of the current environment. With SFR'S at only 50% (or slightly higher) than the cost to build and with the current things going on in the market, values of SFR'S will be going up at a clip higher than the upside of apartment units which can only increase by capital improvements, rent increases (which are likely going down not up), and decreased operating costs which increase cap rates but only

Bryan Hancock · Answer

All else being equal the SFR probably has more appreciation upside, but the apartment could also have the potential for quick forced appreciation if the cap rate is that high.  This question is tough to answer without more data.

Do you have some numbers you can share for each scenario?  That may help some.  A 10-cap for a SFR is pretty high unless it is in some tertiary market in the midwest.

Al Williamson · Answer

Bruce L. this is a really good discussion. Please take a very close look at your framework of thinking "all things being equal" and "getting the same return." There are a lot of moving parts with that 10 unit bldg and it will attract a different caliber of tenant vs. one SFH.

I see the potential ability to raise rent, vacancy rates, and maintenance costs being worlds apart.

Consider adding more detail to your analysis. Best to you.

Bruce L. · Answer

Not sure if it's because I just started looking, but one thing that I have notice is that with apartments is that there seems to be a larger price fluctuation than with SFR.

For for example, I've seen a nearby apartment unit(s) that looks identical (Same amount of units & similar sqft) to the one I'm looking at sold for $280K to $500K within an 18 months time period.

Is it because your dealing with another caliper of buyers who have "bigger pockets"?

All things being equal including appreciation, I, of course would rather deal with one property, one tenant, than 10.  Why would you want to deal with 10 tenants if you're getting the same return on your investment.

Tiger M. · Answer

Bruce L.I probably owned that 10 unit building at one time! it all comes down to your quality of life. I think $40K a door is way too much for old buildings. I had a hard time making them work at $20K a door.  if you prefer less hassel and surprises in your life, buy the SFR.

Apartments or Single Family if same cap rate?

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