Why Forced Appreciation Makes Multi Family Investing Better, Hands Down.


In an earlier article entitled Which Is Better – Single or Multi-Unit Real Estate? I explored some of the advantages and disadvantages of utilizing single family residences verses multi-unit properties as the basis for building a cash flow investment portfolio.  I am going to now build onto this conversation by exploring the subject of Forced Appreciation as it relates to both the single-family (SFR) and Multi-unit investment spaces.

Expandability Defined

In order to discuss forced appreciation, we must first address something I call Expandability.  Expandability is defined in the following way:

Expandability – any tool, technique, term, or approach implementation of which allows an investor to either improve upon the investment returns on a given investment or portfolio of investments, or to facilitate a transaction which would otherwise not be possible. 

Expandability items cover a gamut ranging from the setting of the closing date, which as we all know can have a dramatic impact on a transaction, to financing clauses, rehab items, and everything in-between.

Expandability represents a great advantage of the real estate investment vehicle.  For instance, when buying shares of stock, we essentially are making a “guess” as to whether those shares will go up or down in price.  If we guess correctly, then we make money.  However, fundamentally there is nothing that we can personally do to force the price-action one way or the other.  The same is true of pork bellies, precious metals, bonds, art, and most other things that we can invest in – there are no expandability options available to us in these asset classes.

As we all know, however, this is not at all how things work in the real estate market.  Through strategic management we can exploit elements of expandability and in doing so we can significantly impact the intrinsic value of the asset we are holding.  While expandability can exist in both the single and multi-unit spaces, the inner workings of what is involved are quite different, and this is the subject for today’s article.  Let’s start out by understanding the value-setting mechanism in both markets.

Setting of Value in the Single Family World

If you were to ask your appraiser friend how he determines value in a single family dwelling, he would tell you something like this:

I use the Comparative Market Analysis (CMA) – a process of compare and contrasting sold properties of similar quality and in the same geographic vicinity that sold within a few months prior, and by making adjustments for amenities and square footage I arrive at an approximation of value for the subject…or something like that.

Setting of Value in Multi-Family World

If, however, you ask the same appraiser friend how he determines value of an apartment building, this is what you would hear:

The main reason people buy apartment buildings is because these buildings represent an income-stream.  As such, the valuation of an apartment building is a function of the income, more specifically the Net Operating Income (NOI).  When I appraise an apartment building the question I am asking and answering is: What would a reasonably aggressive investor pay for the income stream represented by this building in this location in today’s economic landscape?

So, if I know that investors in a particular market typically look to achieve a 10% return, then a building with an NOI of $50,000/year should be attractive to them at a $500,000 purchase price.  Having verified the income and expense structures of the subject, and having made adjustments for age, amenities, unit make-up, etc. $500,000 becomes my approximation of value, more or less.

What Does This Mean?

As is evident from the above definitions, the only way to achieve a value spread in the single family world is by buying low, which can be accomplished by either buying a distressed property or buying from a distressed seller.  However, regardless of the reason for the discounted price, buying low is the only way to create a spread in this market since the top-line value of any asset in excellent condition is set by the marketplace based on the comparable sales, and it is impossible to supersede that in a substantive way.  You may very well have done the most incredible remodel and have the best house on the block, but if the comps have established that a house like the one you’ve got, in this location, and with these amenities is worth no more than X, then you won’t be able to beat the market by much!

What I described above is the essence of the Fix and Flip strategy whereby “IF” we’ve purchased the property at a low enough price and “IF” the value created by the remodel exceeds the cost of said remodel, and a whole lot of other “Ifs”, then we can achieve forced appreciation and the property is said to have expandability. (Read So – You Think You What t Flip for more on the subject)

An interesting distinction here is that in this scenario we are not improving the underlying intrinsic value of the real estate, as much as we are recapturing the value which had been discounted by the market due to distress of the property or the seller.

Forced Appreciation element of Expandability in Multi-unit market.

Similar rational can apply to the multi-unit space in that we certainly can negotiate a discounted price based on either the property or the seller distress.  We can then perform the necessary repairs and recapture lost value.  But, in this space opportunities exist to go beyond simply recapturing of discounted value and to actually force the intrinsic value of an asset to expand, and here is why:

This is because unlike the single-family market which establishes value based on comparable sales (I underscore value), on the income-producing side the market establishes the desired rate of return based on returns that investors are able to achieve – this is the essence of CAP Rate.  In turn, the application of the CAP Rate to the income of the specific building is what establishes the value of the building.  Forcing of appreciation in this space, therefore, is a function of expansion of the income, which represents an interesting distinction and creates an opportunity.

The Opportunity

While in order to create spreads in a single family we must purchase at a deep discount, we do not necessarily have to do the same in the multi-unit market.  We can pay a price which is fair based on current financials of the building, and then we can improve the financials and back into an increased valuation, presuming that the rental market will support the higher rents of course.  And naturally, we can do both – we can negotiate a lower price than the current intrinsic value, and then improve the intrinsic value thus benefitting on both sides of the value equation.

Successful investing is conditioned upon many elements, one of which is our capacity to outmaneuver the competition.  So, do you think that there may be an advantage in being able to pay a price that the seller can deem fair?  Is there an advantage in not having to “steel” each and every time?   Do you think that recognizing and capitalizing on opportunities which go beyond the purchase price opens additional doors of possibility for us?

I think so.  While I am no different from anyone else in trying to achieve the most advantageous purchase price that I can, I realize that the purchase price is only one of many negotiable terms and techniques under the umbrella of expandability which can have a dramatic impact on the validity of an investment.  This view of things often enables me to do deals that many other investors look past simply because they can’t “steel” them.  This suits me just fine.  As a matter of general philosophy, I believe that the more fertile ground will be found where the stampede has not been!

While most investors focus on searching for deep discounts, I search for items of expandability.

Photo: Fin Fahey

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.


  1. On most of my single family rentals I will add value by adding a bedroom in the basement or installing a sprinkler system or Ac. There are things you can do to increase rent incone and value with sfr’s besides fix and flip. All my rentals are good enough to flip but I choose to hold them.

    • Mark,

      Putting in bedrooms is a favorite technique of mine. I typically do not do this in the basements. In my local, anything below grade is not considered living space (even if it’s finished) and as such I can not get the same per square foot increase as a bedroom in a walk-up attic would provide. Talk to an appraiser just to make sure that you are getting the value increase that you think you are.

      Thanks for reading Mark

  2. A keen risk to be on the lookout for: investing too much into the improvements such that you can’t make back your investment. A given location will only support so high a price. If you put in more improvements than that location will grant in price appreciation, you’ll lose. This is where you need market knowledge of the location you are investing so you don’t “over enhance” the property.

  3. Glenn Schworm

    Hey Ben,

    Great Article. I enjoyed the different perspective. At the moment we only flip, but as we prepare for retirement we will be holding. Your article gave me some good ideas. It is one of the articles that falls under my saying “You can’t unlearn what you have learned”. Nicely done.

    • Thank you Glenn,

      I am chuckling because I am 38 and I have been preparing for my retirement for years 🙂
      Keep an eye out Glenn because in a few weeks I’ll be publishing a case study of exactly the kind of thing I discussed here. I don’t like to speak in hypothetical terms

      Thank you Glenn!

  4. Great article Ben!

    I just love seeing the value of my rentals going up when I apply strategies to increase income and decrease expenses.

    Do you ever sell and trade up? I imagine most astute investors will only buy using NOI of the past year where as us sellers definitely want to account for increasing future values. I’ve never sold a rental but am thinking about trading up in the future and wanted to know your thoughts on present and future values when considering exit sale price – cap rate aside.


    • Thank you Glenn,

      I am not a fan of selling. I only buy things that I would want to hold onto forever in the first place. If it’s producing milk, why slaughter the cow…

      The quality of the asset and the available expandability possibilities are very important to me because this is how I back into increased value. However, to liquefy the equity I prefer to re-leverage using tools such as refinance, blanket note, cross collateralization, substitution of security, etc…But the bottom line is that I would always rather keep the asset in lieu of selling.

      Having said this, I buy the current NOI and then I expand the NOI. When and if I sell, the asset will valuate much more not necessarily because I stole it, but because due to my management it is a much stronger asset.

      It is important to understand that this rational is only applicable to multiplex (specifically 5 and over). Investors sometimes want to apply it to SFR, but that’s just silly because even if you are able to improve the CF on your rental house, which is fine and dandy, the price-setting mechanism in SFR market has nothing to do with income – it’s a function of CMA, which was the point of the article. You are not going to sell a 3/2 house for more just because you are getting $50 more rent. On the other hand, you absolutely do have a chance at selling a six-plex for a bunch more if each of the units is getting $50 more – makes sense?

      As to selling in the future, if I ever do, here’s my thinking. Who are going to be future buyers? They are going to be people with big money looking to hedge inflation and hoping to get paid. They will want well-operating kept-up assets with stable CF. Furthermore, will they want 10 singles spread out all over town, or will they want a 10-unit? In my opinion, the kind of big money I am talking about will want a 10-plex. This is what I want to own

      Thanks for reading and commenting Glenn

      • One fatal flaw in holding something forever (like the properties I bought last year), is that when retirement rolls around (28 years for me perhaps?), the depreciation I really need at that time will have run its course. No more kids, no more mortgage interest, no more tax deductions except maybe the occasional roof repair write off.

        That’s not the only risk one must weigh, but it’s definitely something to consider in the Big Plan. My hope is to have a handful of EIULs (tax free retirement income), heavily cash flowing and relatively new properties (new tenure of depreciation providing tax sheltered income + less repairs), and finally some good, tax-free cash flow from my MLP stock position.

        • Greg,

          You are right, and your plan makes all kinds of sense. Having a mix of asset classes is a good thing. But, 28 years is a long time. I guess I am just not looking that far ahead because my experience in life has taught me that it is pointless. Crap will happen that we can not even dream of.

          Having said this, I want to own solid high-cash flow assets. As equity multiplies I will have many options and will take the most appropriate exit ramp. I could 1031; or I could re-leverage to buy more RE; or I could re-leverage to invest in tax-free or any other paper; or I could just forget about depreciation and just be happy living off of my CF. Regardless of the option I chose, all of these options are teed-up by expandability in multi space – this is where I feel I can leverage my knowledge to the fullest extent.

          That’s just me. Your plan sounds solid as well. There is more than 1 way to get to where we are all going 🙂

          Thank you for your comment Greg

        • Chris Clothier

          Hey Greg –

          I remember reading an article on here about EIULs before and I will search it out, but in the meantime, can you tell us how that fits your strategy? Also, why do you find holding properties as risky (as long as 28+ years)? My strategy is to have a level of passive income and no debt by that time and am not sure I will still need depreciation and write-offs each year. Don’t get me wrong, I would still love to have them, but I view that as a good thing (hopefully) because I will have paid off my assets – I love your idea of mixed paid off and some newer assets mixed in, btw – and will have transferred the day to day running of my company to the next generation and if the plan goes right my retirement is fully funded.

          Just wondering if depreciation was the only negative drawback you saw to owning real estate forever.


        • Chris,

          To answer your questions in the order you asked:

          1) I like EIULs as a place to store generated wealth. They provide a nice, tax free source of income if you let them grow long enough, and have properly overfunded them. They are also immune to market drops. They aren’t enough to build wealth on their own, but are a nice option to pipe some of the generated wealth of a good real estate portfolio.

          2) One of my key goals in retirement is to avoid as many taxes as possible (legally). Taxes are probably some of the the biggest costs we face as well as most unpredictable and hard to compensate for at that time. Arriving at retirement with a plan best suited at that seems to make sense to me.

          3) Another risk with older property is the cost of maintenance. Newer property simply tends to cost less to repair and maintain. So I would like to enter retirement with property that wasn’t 20 years old when I bought and turned 48 years old at retirement.

          4) I agree that entering retirement with much less leverage than I use now is good, because that’s when I need the mega cash flow. Right now, I don’t need as much cash flow because I live on my day job. But as I approach retirement, I wouldn’t be buying newer properties with 20%-25%. I would be shifting towards 50% down or even 100%, since it’s time to switch from growth to yield.

          In my humble opinion, entering retirement with no tax deductions and property that might be 50 years old sounds a bit inefficient. I hope that by taking advantage of market movements and trading up when it makes sense, I can enter retirement with relatively newer property that doesn’t suffer functional obsolescence and higher maintenance costs. Less taxes + less costs + less debt = more retirement cash for me.

      • Chris Clothier

        Greg –

        I’ll be hitting you up as we get closer to the BP conference – hopefully everything goes as Josh is planning and it happens in Austin, TX. later this year. I think I could learn a lot from grabbing lunch, dinner, coffee or any time i can get sitting down and hashing out strategy with you. I really appreciate your insight.

        All the best – Chris

  5. Chris Clothier

    Ben –

    Very good and thorough article. I really like how you were able to weave each of the paragraphs into a nice ending tying it up. I am not as knowledgable in the multi-family arena and the opportunities there, but I am trying to get up to speed quickly. I purchased two multi-families in the Dallas, Texas area in the last 30 days. Your article was very good and helps to get a nice clear vision of what comes next!

    Thanks – Chris

  6. Very interesting article, and really underscores what I’ve read elsewhere and why I’m hoping my next (2nd) investment property can be multifamily. Thanks for posting. Just oooone nitpick:

    steel – Noun – A hard, strong, gray or bluish-gray alloy of iron with carbon and usually other elements, used extensively as a structural and fabricating material


  7. Adam Demchik on

    Thanks Ben! I favor multifamily over SFH from the prospective of valuation because the valuation of my property is somewhat dependant on how well on manage it (also on market rent) and not the fluctuations in the real estate market. With that, have you ever purchased a distressed multifamily, invested in repair, and increased rent to market? What I’m finding in my market are a lot of “turnkey” type properties that either already have rents at market or the owners are selling their properties at valuation expecting that the new owner will move the rent to market. This doesn’t allow much upside potential either on the buy side or rent-up side. There are also a few distressed properties that I am considering as I don’t want to pay top dollar. Thanks

  8. Ben – while I am a believer and practice the principals you preach, I think it would be a disservice to generalize that your approach fits all or can be achieved by a novice. In fact I think its the opposite and this approach will work for a very limited range of investors.

    First off – the use of income “value add” is a tremendous task. It operates under the assumption that you as the buyer has a set of talents that the previous owner does not have. The seller is typically selling for a reason and I have found that most sellers are not dumb. They understand the difficulties of implementing the value adds and simply have not been able to for reasons that you as the buyer typically does not know. The seller knows he can increase rents but doesn’t for a number of reasons. He knows he can fight a tax assessment or submeter utilities. It is more likely that you will implement strategies that he has already failed at. I am currently in the midst of a value add project and have found that implementing the techniques have been much more time intensive and full of obstacles than anticipated.

    Second is the time commitment. While it is very true that multifamily offers unparalleled opportunity to grow income and thus valuation, it requires an enormous time multiple to execute. All the techniques such as sub metering, rent increases, rehab, etc are tremendous time sinks. Further the tenant management of MFs is much more intense. To put this in perspective, I spend approx 1-3 hours per week managing 30 SFRs. I spend 10-30 hours managing a 32 unit building. I could literally manage 100+ SFRs for the time spent on this one multi. The multifamily project is drama at every turn. If I don’t stay on top of it there is potential to sink very quickly. Not what I would call passive.

    Last point – while I agree that SFR values are a function of everything but income (in contrast to MFRs), I don’t think this is a bad thing. SFRs are very liquid assets that present so many exist strategies. Adding huge value may be limited but time does that for you with very little management.

    I have no doubt that your formula works. I also have no doubt that a very small number of people can make it work. In fact I think the right investor profile for this strategy is so rare that these deals exist based solely on that fact. All sellers would be happy taking an MLS cash offer and moving on. These properties sit on the market until guys like Ben pitch the creative deal. Why is that? Simply because there are not a lot of guys like Ben that can pull it off. Hence, I think this strategy is effective but not one I would recommend. For 99% of investors a diverse portfolio of SFRs is the correct strategy.

    • Serge,

      I seem to have missed your comment for a few days – sorry 🙂

      I agree with everything you said – period! I never suggested that this is easy, fast, or can be done with limited knowledge. I believe that investing is no different from engeneering, medicine, law, accounting, or the violin. Everything requires knowledge, effort, and a long-term view, none of which see too popular with most. This is fine by me since it affords me less competition. This is what I mean by ziging when everyone zags 🙂

      You and I are on the same page. Thank you for reading and commenting!

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