SFR vs Multifamily
Curious to hear the differences in key deal metrics between SFR and MF property types.
Specifically: Cap Rates, Financing leverage/rate, operating efficiencies, yields, etc.
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Multifamily guy on our 5th SFR deal. They underwrite and are evaluated very similarly. Cap rates on SFR in well located areas are comparable if not tighter to multi. Conventional financing options on SFR are the same if not tighter. Primary differences in underwriting are property taxes, R&M expenses, hard costs (horizontal improvements), timing of unit turns are more spaced out.
So re The cap rate spread— ~+50-100bps on SFR vs MF?
Why are RE taxes different?
The cap rate spread is zero. In some cases the SFR product is trading at tighter cap rates than multifamily because there is so much capital chasing a limited number of newly completed SFR deals hitting the market.
Taxes are tricky because a lot of jurisdictions are still figuring out how to assess SFR. It's one of the biggest risk points in the SFR space--there is a lot of potential tax revenue in the space if local governments decide they want to limit new SFR development by taking a punitive stance on assessments or using methodologies that crush non-controllable OPEX figures.
Have you struggled to find a GC to do this for you? The ones we find are either way too expensive or they're in the SFR game for themselves already.
Yes, we are seeing the same thing. We are definitely overpaying our builder partners, but each additional deal we do simplifies the next in terms of establishing a programmatic relationship approach that is "rinse repeat." The underwriting and cost basis still works so we are basically indifferent--just a cost of being in the space.
We've found the exact same thing to be true. Best we can do it partner with smaller townhome builders.
Interesting aspect of SFR build-to-rent is that it seems like condo conversion could be a viable exit strategy alternative to a conventional sale. The developer/owner could create a condo association but hold onto most or all of the units initially, and then strategically sell them off as market conditions dictate. You would have maximum flexibility to sell to the institutional market, the individual homeowner market, or to hold and collect rents in a fine-tuned way.
Agree, for most of our deals we are platting them on a condo map to maximize long term flexibility to swap back to retail sales if the SFR market implodes on a long term horizon. That approach is also seen more favorably from an entitlement standpoint in terms of jurisdictions that are getting sick of seeing rental deals.
What's your anticipated hold period on this? I've been feeling that SFR rentals are slightly draconian but realistically any boost in supply is good for all. Gotta get more homebuilders and tradies out there.
Downside of this is that platting everything on a single lot makes the case against the assessor's office easier.
Since they are detached wouldn't it just be a traditional SFH sale as opposed to a condo conversion? I guess you could form an HOA, but why bother?
You have to build a lot of site infrastructure- roads, sewer lines, stormwater management, etc. Most municipalities won't just let you hand that to them- they want you on the hook for the long-term maintenance. So even if you subdivided the property and put every unit on its own lot, you'd still need to create an HOA for the collective ownership and maintenance of all the infrastructure.
Stabilize and sell. The institutional investor appetite for this product is so hot right now that cap rates are as tight as they will ever be.
How is there any economies of scale with this product? 20 SFR require more maintenance no?
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