Single or Multi Family
I have experience with SFH (single-family houses) and my only exposure to multi-family is through a triplex.
Various Size of Multi-Family
We can distinguish 3 types of multi-family, based on the number of units:
- 1 to 4 units properties are usually assimilated with single-family house. Although a four-plex will have more appeal to investors, they can still be operated by someone who lives in one of the units.
- 5 to 20 units multi-family are often considered to be the most difficult market because the property does not generate enough revenue to justify hiring an onsite management team. Having more units increases the capital and operating expenditures economies of scale (one single deed, one single roof, etc.) but also concentrate risk for the owner. I heard this in an interview with Tom K Wilson on youtube, and when discussing the subject with an experienced multi-family property manager in Kansas City.
- beyond 20 units, more so around 50 units, the property is large enough to justify onsite management which reduces the risk for a given site. 100 units or 130 units are commonly seen, further accreting the economies of scale.
Pricing of Multi-Family
I refer you to BiggerPockets podcast #298 for an interview with Michael Becker, a multi-family specialist.
While SFH prices are mostly determined by how much homeowners can pay, the multi-family market is driven by NOI (net operating income) yield.
According to Michael Becker, the NOI yield 5 years ago was 5% for A area and 10%+ for C areas, the dispersion of yield has now compressed to 4.5% for A deals to 6% for C deals. This means that high cash flow deals are now much riskier.
In comparison, the SFH yields are much more widely distributed. With theoretical gross income varying from 3% to 18% and NOI supposed to be half that (although not everyone manages to make an 18% gross income property earn a positive NOI).
The fact that SFH exceeded multi-family returns seem to be a black-swan event caused by the 2008 credit crisis. Such low prices prompted foreign investors and hedge funds buying SFH as homeowners had to repair their credit, cannibalizing the multi-family investor base.
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