Single-Family vs Multifamily Part 4: Selling A Property

A quick primer: Single-family rentals (SFR) are a single house with one tenant and one lease.  Multifamily properties are apartments, with many tenants and many leases.  I personally have invested in both and see pros and cons of each that I’ll be discussing over the coming weeks.

We’ve talked about the time it takes to buy a property, as well as the costsinvolved, and even what it’s like to own a property, but eventually, you may sellyour property. Today let’s discuss how properties are valued and why multifamily has an edge.  

Single Family Rentals (houses) are valued based on comparable sales in the neighborhood, aka “comps.”  A 3 bed 2 bath house that sold for $200k down the street, will give your 3 bed 2 bath house a comparable value of $200k as a good starting point.  Buyers then look at whether your kitchen has been upgraded compared to the recently sold house, how is your landscaping, your finishes throughout, etc.  All these items can add and subtract from the value of your house, and the price it may fetch on the market.
But there’s also a highly emotional element to these sales.  If the market is hot right now, your house may be worth more, since comparable sales are most likely higher and buyers feel a sense of urgency, but the same goes if the market is down, and buyers feel like ‘its not a great time to buy our dream house…let’s just wait.’ Or ‘We don’t love the paint color in here…We’ll pass.” 

What does NOT necessarily play into the sales price, is the ‘income’ this property produces, since it’s a home after all, not a business.

Multifamily properties (apartments), on the other hand, are valued as businesses.  Buyers are looking at the numbers, not emotions.  They want to know how much income does the property bring in? What are the expenses? And finally, what’s left over as a profit?  
A multifamily property’s value is based on that profit margin.  What can a buyer pay that will still yield a strong return on their investment?  This is a much less emotional purchase, and while it ‘kind of’ matters what other properties sold for in the area, the majority of the value is in the current performance of the property, as well as the potential for future performance of this business. 

Now, the beauty here is that you the owner can actually control your performance (to a degree). Raise rents $25/month per unit.  Offer covered/reserved parking for a $20/month fee.  Change your cable providers for the complex and save yourself $10/month per unit.  Install water conserving plumbing throughout the complex and lower your water bill.  Fill in that pool that doesn’t get used (and costs you money to maintain) and cut that expense completely.  In its place, add a dog park and charge tenants a pet fee, that they’ll be happy to pay since you now offer a dog park! Add coin operated laundry facilities and collect the profit, etc. etc.

As you raise your income and lower your expenses you turn a higher profit margin, and remember, buyers are offering based on what kind of profit the property can give them.  So they can now offer you more for your property since it is performing better based on your business decisions (not comparable sales or emotional buyers).

This is one of my favorite advantages of multifamily properties.  I don’t want to be dependant on comparable sales in the area when my property is running efficiently and kicking off a large profit! 

When you invest passively in large multifamily deals, you don’t have to worry about this on a daily basis, but it is something you want to understand so you can judge an offering based on their business plan.  Will they be able to raise rents, lower expenses, and ultimately raise the value of the property?  If you believe in the business plan and the team executing it, that will turn into a high-valued property that will put solid and dependable returns into your pocket.  

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