Rental Property Investor · Bushwick, Brooklyn · Member since 2020 · 55 posts · 16 votes
In the BRRRR podcast, episode 327, David Greene made a comment (1:08:30ish) suggesting his single-family homes tend to add equity for him and his multi-family homes contribute more cashflow. He suggested the two asset classes work with one another in a complementary fashion.
Can someone explain why this is true (particularly why single-family properties tend to add more equity). I'd be especially curious to see any example math behind this if it exists somewhere.
Rental Property Investor · Batavia, IL · Member since 2018 · 452 posts · 672 votes
6y
@Scott K. The reason he generalizes that is because SFR are purchased primarily by homeowners for the intent of living in them. There is a large pool of "unsophisticated" buyers in that market who are making emotional purchases based on what they like and don't like which means SFR historically rise in price more over time. When you have a lot of people bidding on the same thing and there's emotions involved, the prices naturally bid up so the appreciation of SFR nets you additional equity over time. On the flip side, MFR are primarily purchased by investors who do so based more on objective numbers and thus are less likely to get into bidding wars. Also, the number of people in the market for a multifamily property is significantly less than SFR which limits the pool of buyers. Because of this, MFR tend to have less appreciation compared to SFR, but because you have more units under one roof they often cash flow better.
Real Estate Entrepreneur / Investor · Chicago, IL · Member since 2016 · 688 posts · 367 votes
6y
Well. I'll state that I haven't watched that episode. But, are these apples to apples comparisons? Such as both the SFH and MFH being in the same or equivalent neighborhood? Nearly identical Square feet? etc, etc....
Rental Property Investor · Batavia, IL · Member since 2018 · 452 posts · 672 votes
6y
@Scott K. The reason he generalizes that is because SFR are purchased primarily by homeowners for the intent of living in them. There is a large pool of "unsophisticated" buyers in that market who are making emotional purchases based on what they like and don't like which means SFR historically rise in price more over time. When you have a lot of people bidding on the same thing and there's emotions involved, the prices naturally bid up so the appreciation of SFR nets you additional equity over time. On the flip side, MFR are primarily purchased by investors who do so based more on objective numbers and thus are less likely to get into bidding wars. Also, the number of people in the market for a multifamily property is significantly less than SFR which limits the pool of buyers. Because of this, MFR tend to have less appreciation compared to SFR, but because you have more units under one roof they often cash flow better.
@Scott Passman the same can be said for MFH as well because many "investors" (newbies) also make decisions based off their emotions as well. Also there are some investors who like SFHs as rentals as well. As long as the cash on cash return is good. A intermediate to experienced investor knows. Buy rentals for the cash flow. The appreciation is icing on the cake. So many SFHs across America is also homes to tenants and not just home buyers. Hence why I was a bit confused. In theory, a SFH and MFH in a high end area should be appreciating or losing value at the same pace based on the neighborhood itself.
Rental Property Investor · Bushwick, Brooklyn · Member since 2020 · 55 posts · 16 votes
6y
@Elbert D. your comment sparked a question in my head. Do you use, or are you aware of, any online tools that help with measuring the investment health of individual neighborhoods? Off the top of my head, these might look at changes in property value, income growth, etc. Or does this sort of analysis almost purely require boots on the ground?
Real Estate Entrepreneur / Investor · Chicago, IL · Member since 2016 · 688 posts · 367 votes
6y
@Scott K. no sir. I don’t have any software for that. To me in my opinion. I think we have to remind ourselves that software for real estate is still new. Take for example something like Zillow. They use algorithms heavily. Just like most real estate software. Some use different formulas. But Zillow ARVs are usually all over the place. I don’t think there is any real indication of truly knowing without having boots on the ground. That only gets you so far too. No one has any clear indication how much a neighborhood value is going appreciate. It’s either going up or down. But the percentages are just estimates. Hence why everyone keeps bringing up how real estate is really a local game. Which I tend to agree with, but there are ways to being “local” without being local lol.
With that being said, a really good realtor who isn’t desperate for a sale. Should definitely be a tool for you based on the questions you asked.