Large Multifamilies vs. Many Single Families

4 Replies

A long ongoing debate is whether it is more beneficial to own a large multifamily or continuing to buy many Single Family Residences. I was just curious what all of your guys thoughts are.

Nate Witte

@Nathan Witte there are so many ways to make (or lose) money in REI you can choose what aligns with your goals. Generally SFR will appreciate more quickly and is easier to sell. MF on the other hand offers economies of scale impossibe to hit with SFR; lately MF prices are through the roof too. So pick what works for you and pursue that with all you got.

How about door #3: both. It doesn't always have to be a "this or that" choice; rather, move forward with diversifying the portfolio. Perhaps an investor feels better owning and managing SFHs on their own, but then wants to own MFH through a limited partnership or syndication, or vice versa. Perhaps instead of "vs" it should be "+" for different real estate investments. 

SFR and MFR are very different.

There are three ways to value real estate. One, the least commonly used by investors is the replacement value. This becomes important for insurance coverage and not much else. 

Another model is the income method. You look at the net cash flow (independent of any debt service) and discount it. You are buying an income stream. This is the method used to value income producing assets. Mostly when there is no other reasonable way to value the assets. Think of them as a container or basket which represents the cash flow over time. You pay for the instream the container controls of holds.

The third method is used mostly when the buyers and sellers are not interested in the economics of the asset. Owner-occupied real estate is more about the benefits or utility of living there which has nothing to do with what the property might attract. Owners do not consider the rental income possible when they live there. They look at the property as something they will use so they compare one house to another. Which one do they like the best for the same income level?

So, when you invest in MFR, you are investing in an income stream. When you buy SFR, even as a landlord, the income stream is not going to determine the market price. The price is mostly set by the competition and most of them are not thinking about income.

So, if you are thinking of a number of SFR vs MFR units, you are really comparing two different animals. Both can be fine. Just understand that they will not align all that well because they are not valued the same way. Each might have toilets and places to sleep. One can not become owner-occupied so will never have the OO premium that most SFR attract.

Depends on your market, your desired scale, and your exit strategy.

SFH:

  • Easier to understand and price
  • Pricing set in competition with other owner-occupants
  • Easier to sell off in pieces and at retail prices
  • More systems to maintain than MFH all things being equal
  • Harder to scale than MFH
  • Higher rents per door
  • All systems usually tenant maintained

MFH:

  • Pricing set by profitability (cap rate)
  • Exit strategy generally only other investors
  • Easier to maintain in larger numbers than SFH all things being equal
  • Easier to scale than SFH
  • Lower rents per door
  • Some systems maintained by you

There's no answer to "which is better". If your market has very few MFH it might be priced poorly or be in very poor locations. Or you might be somewhere that the SFH is all 80 years old and in the ghettos while the MFH is all new and on the desirable edges of town.

Anyone that tells you one is better than the other is best ignored. 

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