Single-Family vs Multi-Family Housing

There are many differences between these two asset classes, a key one being their valuation methodology.

1️⃣ Single-Family:

- Valuation is driven by local comparable sales, i.e. what your neighbour’s house sold for.

- Whether a property is tenanted, and the level of rent it generates, has relatively low importance to the valuation of a property.

2️⃣ Multi-Family:

- Multi-family properties are valued like businesses.

- Value = Earnings * P/E multiple, in real estate lingo: NOI * (1/Cap Rate).

- Therefore, for similar properties, higher earnings will command proportionally higher valuation.

This gives multi-family properties an important feature: the ability for owners to create value appreciation through increasing its earnings. For example, every $100 increase in monthly rents can generate $25,000 in value appreciation.

In today’s macro environment, it becomes increasingly important to optimize operations and generate Earnings growth, which can offset or even overcome the effect of falling P/E multiples, creating appreciation in a generally down-trending market.