Is investing in Multifamily properties superior than Single family?

[Thomas Beyer]

[quote user=bizaro86]Since properties are much less fungible and less liquid that shares of stock, an estimate is really the only way to go.
Fair enough. An appraisal is just that: an estimate of a property value at that point in time. It may rise or drop from there - similar to a stock.



However, on average, rents go up with inflation and so do property value ... or faster with some real improvements for the top line such as property upgrades or better customer serice or better marketing or lower vacancies or the expense side such as more efficient heating systems or new windows.



Properties are quite liquid in larger markets if priced properly. They sell quite fast .. say in 2-4 months. It may take a lot longer in smaller markets or if one wants an unrealistically high price.



The key drawback of single family homes (vs. multi's) are:

a) the substantial time commitment, unless you buy a rental pooled condo which takes very little effort if well managed, say hours/year as oppposed to days/month in a self-managed single family house.

b) the fairly high realtor fees on exit (3-4% vs. 20% down or 15-20% of equity or even higher % of profit !!)

c) the 100% vacancy effect if a tenant leaves or doesn't pay, as it can take up to 3-4 months to evict the guy, reno the unit and re-rent it. Thus, have an appropriate reserve.

d) the increasing difficulty (and sometimes inability) to scale beyond 10-12 homes in most cases as banks will not lend anymore.

e) the management inefficiencies when managing multiple properties



Get a return on your green $s but especially on your blue $s ! You can always make more money later, but time wasted is lost forever.

 

[Rickson9]

@housingrental

Thanks for the response. I don't know much about the Ontario market so it's good to get an opinion. I don't much like cap rates or cash on cash metrics either, but I use them anyway. I don't like cap rates because much depends on what an individual considers 'expenses'. I don't like cash on cash because of the expense issue, but also because of the impact of leverage. To reconcile this, I evaluate an investment property based on no mortgage and 50% of rent going to expenses. With these in mind, I am looking for a 10% cash on cash (which in the case of no mortgage, would be the same as the cap rate).



@bizaro86

Good point re: mark to market + liquidity issues.



My personality has always had difficulties reconciling the idea of borrowing money, so real estate has never been a strong suit for me. I continue to turn the idea of changing this perception in my mind. It will take time.

 

[housingrental]

Thanks Rickson9

If you want to pacify yourself for your decision just remind yourself that the lender does not have to renew at end of term. This should help keep you happy with your path

 

[bizaro86]

[quote user=ThomasBeyer]Fair enough. An appraisal is just that: an estimate of a property value at that point in time. It may rise or drop from there - similar to a stock.





For sure. My point was mainly that using an estimate has to be appropriate for real estate, simply because you usually can't find a piece of real estate exactly the same as yours that has sold today. Whereas a stock you can usually find a share just like yours that sold today, and that gives you an indication of the current market price of your share.



There are some exceptions to this. I own a condo in a complex with 100+ identical units, and they generally sell for about the same price. Market price for my unit is about the same as the last one to sell.



This gets harder the more unique a property is, and that would certainly be the case with multifamily, where expenses, management quality, tenant quality, and rents received all play into it, and comparables are less important to the average buyer.



Regards,



Michael

 

[johnsu]

Residential vs multifamily



I think "better" is not the effective criteria but "different" would be a more accurate comparison.



There's an equal amount of "advantages and disadvantages" with both types of properties. It's really more about finding the "more sutable" asset depending on 2 factors: Cash and experience.

 

[RussellWestcott]

Great discussion...



Just completed a recent conference call recording with Pierre-Paul Turgeon, where we discuss in-depth the pros and cons of Multi-Family vs. Single Family.



To download this audio >> click here