People thinking of investing in and evaluating residential property must understand the difference between the two major categories; Single Family Homes (SFH) and Multi Dwelling Units (MDU) are evaluated differently. This has a direct bearing on the nature of returns they can expect from their investments. Among the first things that one notices about the valuation of the two types of properties is the fact that SFH generally cost less since these comprise of just one dwelling unit, whereas one would have to pay more for the many units that comprise MDU.
SFH are mainly evaluated on the basis of comparing the value of a property with the sale price obtained by similar property in the previous twelve months in a half mile radius. Evaluating MDU is more complex than doing the same for a SFH. In this case one usually uses either a cap rate or a gross rent multiplier. The former denotes the annual net income before taxes divided by the current market valuation of the property. The gross rent multiplier on the other hand is the gross property value divided by total rent obtained. As one can see the principal difference in evaluating SFH and MDU lies in the fact that the former is sales returns oriented and the latter is rental income dominated.
As to which type of housing property one should buy, that depends upon the reason for buying. For those looking at regular income MDU are the way to go, while those that prefer quick returns, an SFH should be more attractive. However, local factors also play a role in deciding what type of housing property one would want to invest in. Chicago for example has seen renting take precedence over buying. One would therefore see more people investing in MDU type of housing property. Both SFH and MDU have their distinct advantages and the best way to decide what is right for one is to get the comparative properties evaluated and take a decision based on merit.
Summary: There are differing approaches used in evaluating Single Family Homes and Multi Dwelling Units. While the former is evaluated keeping the return on investment in focus, the latter is more oriented towards creating a healthy rental income.
Twitter Summary: Single Family Homes are evaluated with the objective of obtaining good returns, while Multiple Dwelling Units are evaluated with the view to obtain healthy rental income.