Do MFs fare better or worse than SFHs in the same market?

Question

Hi BP,

I am just getting into the multifamily space and was wondering if MFs are more or less resilient than SFHs in the same market during a housing downturn. I am looking at MFs in Cleveland and wonder if I should wait 3-6 months if consensus is that home prices will continue to fall in that period (and maybe even beyond). Just curious how much of this downturn affects MFs. I know rates will likely go higher but let's ignore that for now.

Thanks.

Colby Fryar · Answer

@Susan W. I think that is a pretty easy answer.  Multifamily will outperform single family in a downturn most every time.  The reason is that single family is more emotionally based and the values are a result of comparable properties in the area when it comes to pricing.  Multifamily is run more as a business and therefore the prices are reflective of the performance of the business.  There is no emotion to it or at least there shouldn't be.  It is simply a numbers game and the better the business performs, the more value that is attached to the property.  There are also great advantages to the scalability, especially in larger multi.  In addition, there is a huge advantage with respect to affordability, as well as having multiple doors under one roof when people move out or rents are reduced.

I would encourage you to research the great recession and compare the number of foreclosures.  Single family as we all know was decimated during this time but multi help fairly well.  Granted-  every recession is different, so maybe I will eat crow this time!  Multi is definitely not recession proof but the asset class typically performs much better than most asset classes in real estate.

Susan W. · Answer

@Bill Brandt thanks for the tip! : D Makes sense about Vegas given it was among the hardest hit during the FC. I can def. see advantages to both SFHs and MFs. For now, I'm going to focus on MFs and try to build my niche there. I'm gathering that different property types can all be great investments, if you make it such.

Shane Kelly · Answer

Considering how low MF inventory is in Cleveland right now, you might have to wait to find a truly good deal. However, there's a possibility with the demand being so high that prices will not fall down in MFs. I'd say if you're doubtful, then you're not looking at good enough deals. When you find a great deal, it won't matter where the market is, you'll know it's right.

Carla Kordab · Answer

I recommend you to discuss this with @Shane Kelly he can give you a great advice.

Bill B. · Answer

@Susan W. quick note: you can put all your replies in one post

@name 2 thanks

@name3 good to know

@name4 thanks for the update, etc.

I would assume every market is different. In Vegas SFR has appreciated almost twice as much since the Great Recession compared to MF. During the Great Recession MF faced double digit vacancies and falling rents why SFR had almost zero vacancy and rents were rising double digits.

The advantages I find with SFR is zero tenant on tenant or tenant on neighbor problems, I can sell to an owner occupant who wants to live in the house not an investor looking for a deal,in Las Vegas the SFR is much newer and nicer and located in better neighborhoods. If I own 1p SFR vs 3 x 4plexes vs 1 12plex. I can sell as little as 1/12th of my portfolio, vs 1/3rd or 100% or none. I can move in to a previous rental and save some capital gains taxes. I can exchange anything from 1-12 properties for something else or somewhere else, it’s not all or nothing. In my market SFR tenants tend to stay much longer (7-12+ years) vs 1-3 years. If 2 people meet and one rents an apartment vs one renting a home, they move to the home. If they have a kid or two, the house is still plenty big enough they don’t have to move.

Now get a MF person to weigh in, and more importantly, someone in your market to weigh in if what’s true in my market is true in yours.

Susan W. · Answer

@Andrew Weiner @Bud Gaffney thanks! appreciate your comments!

Susan W. · Answer

@Mike D'Arrigo Thanks for your comments. I'm interested in small MFs so under 5 units.

Bud Gaffney · Answer

@Susan W. The more units under 1 roof the better.

Andrew Weiner · Answer

Like others have said, the market can do anything.  There is A LOT of cash on the sidelines and even a 5% pull back could bring in a whole slew of buyers.  There are probably at least a dozen other realistic possibilities too.  Between MF and SF I am leaning toward SF these days, it’s easier to manage (as a PM it makes a difference to me).  Also I think that the tenants are usually more stable which correlates to better long term cash flow.  That being said I also own MF and will continue to buy both depending on the deals that are available.  Even if you end up buying before a pull back, as long as you cashflow you’ll be fine over time.

Do MFs fare better or worse than SFHs in the same market?

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