How Value is Determined: Multifamily vs. Single Family
🏘️ How Value is Determined: Multifamily vs. Single Family
When it comes to real estate, not all value is calculated the same way.
Single-family homes are valued based on comparable sales (aka “comps”) — what similar homes nearby have sold for. This means even if you increase rent or improve the property, its market value may not change unless similar homes reflect that same increase. It’s emotional and market-driven.
In contrast, multifamily properties (5+ units) are treated like businesses. Their value is driven by Net Operating Income (NOI) — the income they generate — and the cap rate (a market-based return expectation).
The formula is simple:
📈 NOI ÷ Cap Rate = Property Value
This means when you increase income or reduce expenses, you directly increase the value of the property. It’s formulaic, scalable, and gives investors more control over equity growth.
Now let us use a real-world example to highlight just how powerful this relationship is in creating value.
For this example, suppose you renovate a unit with a budget of $10,800.
🧮 Single Condo Example
Renovation Cost: $10,800
Rent Increase: $200/month ($2,400/year)
➤ Step 1: Time to Recoup Cost
Payback Period = $10,800 ÷ $2,400/year
= 4.5 years
💡 With a single condo, your return is linear: it takes 4.5 years just to break even on your renovation.
🧮 Multifamily Syndication Example
Renovation Cost: $10,800
Rent Increase: $200/month ($2,400/year)
Cap Rate (example): 5% (0.05)
➤ Step 1: Increase in Net Operating Income (NOI)
Annual increase in rent = $200 × 12 = $2,400/year
➤ Step 2: Increase in Property Valuation
Using the formula:
Value Increase = NOI Increase ÷ Cap Rate
= $2,400 ÷ 0.05
= $48,000
💡 $10,800 spent = $48,000 in value creation
That’s a 4.4x return on your renovation cost in terms of property value.
🧠 Key Takeaway:
When you invest in a multifamily syndication, every $1 of increased NOI can translate into $20 or more in asset value, depending on the cap rate.
In contrast, with a single condo, you're relying solely on rent to recoup costs, which takes much longer and doesn’t multiply value the same way.
Lastly, let us highlight how this concept impacts how a lender views each type of property.
🏦 Lender Perspective: Residential vs. Commercial
🔹 Residential (Single-Family Homes):
When financing a single-family home (or any residential property with 1–4 units), lenders evaluate you as the borrower. The loan decision hinges on your personal financial profile, including:
Credit Score
W-2 or 1099 Income
Debt-to-Income Ratio (DTI)
Tax Returns and Pay Stubs
Even if the property generates rental income, it may only be partially considered — or not at all — in underwriting. This limits how many loans you can qualify for based on your personal income, regardless of how well the property performs.
🧠 Key takeaway: With residential loans, your ability to scale is constrained by your own financial capacity.
🔹 Commercial (Multifamily 5+ Units):
With commercial loans, lenders evaluate the property itself as a business. The focus shifts from your personal finances to the asset’s ability to generate income. Key metrics include:
Net Operating Income (NOI)
Cap Rate
Debt Service Coverage Ratio (DSCR)
Occupancy Trends and Rent Roll
Stabilization Status
While your experience and credit still matter, lenders primarily want to know:
Can this property pay the mortgage on its own, reliably and profitably?
The predictable way you can affect a commercial property's valuation is one of the most important concepts to fully understand and one of the main reasons why this asset class is so powerful. The realization of this concept is what caused me to pivot away from primarily focusing on residential properties and fully pivot to multifamily properties. Make sure to re-read this newsletter days from now to fully appreciate it.
In order to manipulate the net operating income (and the valuation of the property as you target the eventual sale down the road), either you increase revenue or decrease expenses.
🔼 Ways to Increase Net Operating Income (NOI)
🏠 Revenue-Boosting Strategies:
Raise Rents to Market Rate
Most direct and impactful method.
Conduct rent surveys to justify increases.
Implement RUBS (Ratio Utility Billing System)
Bill tenants for a share of utilities like water, gas, or trash.
Converts a major expense into a shared tenant cost.
Add Paid Amenities
Examples: in-unit washer/dryer rentals, storage lockers, covered parking, or package lockers.
Low-cost upgrades can generate monthly income.
Charge Pet Rent or Pet Fees
Many residents are willing to pay for pet-friendly accommodations.
Offer Premium Unit Upgrades
Renovate kitchens, bathrooms, or flooring and charge a rent premium for “premium” units.
Install Vending Machines / Laundry Machines
Create small but steady streams of ancillary income.
💰 Expense-Reduction Strategies:
Renegotiate Vendor Contracts
Landscaping, trash, maintenance, pest control, etc.
Bidding out contracts can lead to big savings.
Improve Utility Efficiency
LED lighting, low-flow toilets, smart thermostats, and sub-metering.
Lower bills = lower operating expenses.
Self-Manage or Optimize Property Management Fees
Negotiate performance-based fees or bring some services in-house.
Reduce Turnover and Vacancy
Improve tenant experience through better communication and responsiveness.
Even a small drop in turnover = significant savings in make-ready and leasing costs.
Tax Appeal
If you recently purchased a property above assessed value, work with an attorney to appeal the property tax.
💡 Key Takeaway:
Increasing NOI doesn’t always mean just raising rents. Many improvements—especially reducing waste and adding services tenants want—can make the property more profitable and more desirable.
