Single family vs multi-family pricing efficiency

[Jon Wisniewski]

Hello,

I don't own any property yet but have recently completed a certificate in CRE valuation. I intend to use this knowledge to find a property with a healthy levered IRR for long term investment. That is my goal.

That said, I am in the New York city area and would like to use a VA loan. That limits my property type to condos (fairly rare in NYC, most are Co-Ops) OR multifamily properties (4 units or less) in the outer boroughs. For the purposes of this post, let's assume I can ONLY invest in the NYC area.

With all that in mind, I wanted to ask the community: which properties are price more efficiently in "hot" markets: single family (like condos) or multifamily properties? I am noticing when I run Condos through the DCF process, they are WAY overpriced right now (30% premium). I am guessing this is due to interest rates being so low and general housing market demand. BUT when I run a multifamily through the DCF, they're priced much closer to what the DCF says I should pay, given the same expected unlevered IRR. I assume this is because investors will be buying these properties.

Thank you all so much for your help!

[David Pere]

@Jon Wisniewski The other piece to that puzzle is that residential properties aren't valued in the same way as commercial real estate, so you're viewing them through a lens that doesn't necessarily apply to them. People buy Condo's based on two main factors 1) comps and recent sales, and 2) emotion, because they "want" that home, and are willing to pay more. 

There are fewer people looking to buy 4-plexes, either for the price, or the idea of owning a property with tenants, or just lack of knowledge. For that reason, I find that 4-plexes generally provide a ton of value for the purchase price.