Posted by David Krulac on March 08, 2003 at 07:19:05:
all appreciation is local. some aras may be going up while others are stabile or declining. So you need to know your local market.
SFH are sold on the basis of what other comp houses sold for recently. Since most buyers of SFH are NOT investors, the SFH are most sold NOT as investments. Therefore mnay of the prices are higher than they would be if bought as investments. In my market SFH represent 95% of the market, with multis only being 5%. There are in other words 20 SFH buyers for every 1 home buyer and that’s when the multi market is good.
In a bad market the multi market share declines.
In 1987 there was a big Federal tax change that affected rental property. As a result there were years of stagnaged prices as there where properties bought for tax purposes that didn’t make economic sence.
Multi units are sold on the basis of NET income. So in times when expenses are rising and rents are stable, then the value of the building is declining.
Prices will only rise when rents or NET income rises.
Buy a building and cut the expenses without raising the rent and the value increases.
Does anyone have stats on appreciation rates by city or nationally for how much a single family home goes up per year % compared to a Multi-Family (10+ unit) type of building. Can a 10+ unit building appreciate much in a market if the rents don’t seem to go up?
You are talking about two different animals, so you really can’t compare appreciation rates. Consumers mostly buy SFH’s, hence they may go higher and will not be based on cashflow.
Apartment properties values are based on NOI. Could they appreciate even when rents don’t. I have seen increases lately mainly due to people getting out of the stock market and looking for a place to invest their money. Real estate is the logical choice so with more buyers, prices are going up even though the cashflow does not justify the increase.
They are very much the same, except that house prices usually rise first and multi families follow suit a year or 2 later. In other words if house prices rose 20% in the last 2 years but multi families are the same price as they were, buy quick.
Other than that they rise at the same rate whether rents rise or not, and even if rent control forbids rent raises forever. I have seen apartments go from strong positive cash flow to horrible negative cash flow because the price rose 25% a year while rents rose 2% to 4% per year. It didn’t seem to phase people. The real estate agents sold them on the basis that you would frankly have to put down 25% as a down payment then pay out of your pocket every month, but in 2 or 3 years you could sell for a big profit. This made no sense to me but that’s how the market worked for over 10 years (1977 - 1989).
The two big factors in appreciation are demand and construction costs. There should be somewhat of a correlation between rents and appreciation, but at times they can get way out of line and show no relationship whatsoever.
A 10+ unit can indeed appreciate in a market where rents do not go up much at all because many other factors come into play such as rent control, interest rates, gentrification of the neighborhood, and the state of the economy. Whether it will appreciate is very hard to predict because of these factors and more.