Appreciation on single family homes vs multi family

General Real Estate Investing
9yFollow

Appreciation on single family homes vs multi family

Jack B.
Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

I have read that MFH are valued via their cash flows, not the typical supply and demand that SFH are valued by. That said, I'm considering selling my portfolio of SFH to buy a huge apartment complex, a few million bucks worth.

One thing that I really like about the SFH's right now is that since I bought at the bottom, I'm still making money on the appreciation while they go up. For example, from my 2 most expensive properties I'm pulling in about 125K a year in appreciation. That's just two of them. Won't last forever, but we are still in a low supply phase. It will likely keep going up for a few more years. OF COURSE I bought for cash flow, and consider appreciation as a bonus, but I like the bonus...Tax free added to my net worth, which I can convert to cash flow tax free.

That said, I feel like while I might be increasing my cash flow by buying an apartment complex, I feel like I'm leaving money on the table by cashing out of leveraged properties in the Seattle area that are making me oodles of money. 

Originally wanted to let these fatten up a bit before I make the apartment complex leap. Now I'm wondering if I shouldn't take advantage of low interest rates for it, who knows where they will be 5 years from now. I could sell my cheaper B-/C+ properties and buy a one million dollar complex for now, then sell my A properties once they are niiice and fat with appreciation.

1Reply
32 views

10 Replies

Jump to latestLatest
  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    9y

    MF's 2-4 units(residential) are based on comps(similar properties that sold within past 3-6 months within .5 or 1 mile radius)  5+ (commercial) properties are valued based on the income it produces.  That's the difference my friend.  Best of luck!

    0Reply
  • Levi T.Pro Member
    Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    I have a good mix of SFH (Townhouses) and apartment complexes. If I could buy more SFH in big batches, I would. Don't get me wrong, if a great apartment deal showed up, I'd jump on it, but finding a good deal on an apartment right now is not easy as everyone want's one right this minute and SFH are cash cows compared to them. Go find a great deal that will give you as much, if not more than your getting now, then sell some properties to pay for the deal. That way your winning on both ends.

    0Reply
  • Denny Hancock
    Investor, Real Estate Agent, & Property Manager · Bellevue, WA · Member since 2015 · 18 posts · 1 vote
    9y

    Hey Jack, I'm considering the same thing (on a smaller scale) with my SFH rental in Kirkland. I think the key question to ask is how long this appreciation will keep up and what the market correction (assuming there will be one) might look like in this market or where you're looking. One strategy I've heard is to build equity in your growth phase and convert to cash flow properties when you're ready to retire / quit your day job etc.. I'm not sure how that might apply to you, but I think about that often when weighing my options. Good luck! ;)

    0Reply
  • Jack B.
    OP
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Shawn Ackerman:

    MF's 2-4 units(residential) are based on comps(similar properties that sold within past 3-6 months within .5 or 1 mile radius)  5+ (commercial) properties are valued based on the income it produces.  That's the difference my friend.  Best of luck!

    Good breakdown and confirmation of what I've read. Seems like inflation will increase the value of my property (and good cost reducing management). I see less risk this way, as it's not as cyclical as SFH appreciation.

    0Reply
  • Jack B.
    OP
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Denny Hancock:

    Hey Jack, I'm considering the same thing (on a smaller scale) with my SFH rental in Kirkland. I think the key question to ask is how long this appreciation will keep up and what the market correction (assuming there will be one) might look like in this market or where you're looking. One strategy I've heard is to build equity in your growth phase and convert to cash flow properties when you're ready to retire / quit your day job etc.. I'm not sure how that might apply to you, but I think about that often when weighing my options. Good luck! ;)

    I expect real estate to crash again in a few years. Not quite as bad, but significantly. It operates on a cycle that is sure to repeat again. From what I've read and what others have pointed out to me including here, it seems like converting the equity from an appreciation market to a cash flow market (not to mention SFH to MFH) seems like it would be the way to go, since MFH is valued based on income and profit rather than comps.

    Between that and the reduced risk of huge loses due to vacancy of say, a single family home with a 3K a month mortgage (like one of mine, vacancy = ouch), and the more efficient management, it seems like it's the way to go. Trying to find the right time to do it is important too though. I'm still thinking about that as well. Like I said, partly considering doing it now because of low interest rates, though I may be leaving appreciation on the table by doing so. At the same time though, the inflation of rents over time on a MFH will help make money over the several years I would have held the SFH's. I just need to calculate by how much, factoring in interest rates now vs projected 5 years from now, to see which has the better numbers and make a calculated decision on timing.

    0Reply
  • Jack B.
    OP
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Levi T.:

    I have a good mix of SFH (Townhouses) and apartment complexes. If I could buy more SFH in big batches, I would. Don't get me wrong, if a great apartment deal showed up, I'd jump on it, but finding a good deal on an apartment right now is not easy as everyone want's one right this minute and SFH are cash cows compared to them. Go find a great deal that will give you as much, if not more than your getting now, then sell some properties to pay for the deal. That way your winning on both ends.

    SFH are cash cows right now in VA? Or is that not cash flow but more so appreciation? Seattle is literally one of the worst rental markets in the country. The price to rent ratio is ridiculous. Most people don't make money from cash flow here on SFH, heck residential MFH have little cash flow even here.

    I'm happy to say I make a tad over 50K from rents but I bought at the bottom, either in cash or with 20% down. Plus I've been riding the inflation wave and manage myself. I do make about 150K a year from appreciation alone. That keeps me warm at night. 

    BUT...no one can predict the market consistently. I could wait 5 years and have sky high interest rates to deal with if I try to convert to MFH then, and who knows the market may tank before then. OR, I could pull the trigger in the next year or two while supply is still tight (houses are still appreciation, correction far off) and rates are low and go for it. I think when I put it that way, I'm almost leaning toward doing it sooner rather than later. I just need to crunch the numbers as well to assess whether the cash flow from rents increasing over the next 5 years will make up for 5 years of appreciation losses. My gut tells me the cash flow gain over 5 years of rising MFH rents won't hold a candle to 150K a year (compounding each year too so really more each year) worth of capital gains via appreciation I get with SFH.

    Make sense?

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    There are two major problems with appreciation on a rental income investment. Having equity sitting dead in a property (due to appreciation) kills cash flow due to the opportunity value of that cash and appreciation is of zero positive value unless you either regularly pull out the equity or sell the property. Appreciation that is not accessed is of negative value.

    Don't be greedy take advantage of what you have and move on otherwise appreciation will continue and you will never decide to benefit from it. 

    0Reply
  • Mark Allen
    Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes
    9y
    Jack B. Levi Thornton my team brokers SFR portfolios across the country - in the last 2 months, we listed over 550 in Chicago and 69 in Tampa; Closed 33 in DFW and 330 in Charlotte. Cap rates have continued to compress across commercial real estate sectors and a lot of our buyers (high net worth/REITs) are jumping on SFR Portfolios, so it's a great time to sell and 1031 into an asset class like MF. Send me a message if you want a set-up a call to discuss further and have us provide you a Brokers Opinion of Value for your portfolio.
    0Reply
  • Jack B.
    OP
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Denny Hancock:

    Hey Jack, I'm considering the same thing (on a smaller scale) with my SFH rental in Kirkland. I think the key question to ask is how long this appreciation will keep up and what the market correction (assuming there will be one) might look like in this market or where you're looking. One strategy I've heard is to build equity in your growth phase and convert to cash flow properties when you're ready to retire / quit your day job etc.. I'm not sure how that might apply to you, but I think about that often when weighing my options. Good luck! ;)

    Just read this again and I think it makes the most sense. Though I will say, I will be pooling cash before the next crash so I can buy some highly leveraged single family homes again after the coming crash. Why not? Ride that market up again and 10-31 into more apartment complexes. I'm really starting to see how some of these people get 100+ units quickly.

    0Reply
  • Jack B.
    OP
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Mark Allen:

    Jack B. Levi Thornton my team brokers SFR portfolios across the country - in the last 2 months, we listed over 550 in Chicago and 69 in Tampa; Closed 33 in DFW and 330 in Charlotte.

    Cap rates have continued to compress across commercial real estate sectors and a lot of our buyers (high net worth/REITs) are jumping on SFR Portfolios, so it's a great time to sell and 1031 into an asset class like MF. Send me a message if you want a set-up a call to discuss further and have us provide you a Brokers Opinion of Value for your portfolio.

    Mark, is it cheaper to sell to a REIT fund from a transaction cost standpoint? I was planning on listing myself to at least cut out the agent fees on that side of the transaction, though it appears selling to a REIT may be cheaper, but I'm not up on the fees associated with that yet. Also, from what I've been told, the REIT's value the houses based on net income / cap rate. I ran the numbers on my rentals based on that formula and shockingly they came out to the same dollar amounts as the actual comps for the properties are. I just don't want to get low balled and leave money on the table. Word has it the REIT's don't low ball but by for long term cash flow.

    I've also been told it's better to buy one big apartment complex than several smaller ones because the transaction costs are huge and you also save on property management this way.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free