Now we’re getting into different property types that to a certain extent compete with each other.
I would characterize any use of rental factors to sale prices for SFRs to be an indirect indicator. It’s interesting as a point of analysis, but hardly anyone who’s buying or selling pay any attention to them when they make their decisions.
With the exception of short term flipping activity, the typical buyer for most homes is an owner-user. The economic proceeds are always a motivation but the fulfillment of emotional needs and the shelter aspect of SFRs will always be the main thing. Rental factors are useful to the extent that rental occupancy is an alternative to occupying it themself, but since that alternative is not often considered seriously it’s kind of a sideline.
Comparing SFR rental factors to those from other types of real property gets real tricky real quickly. For one thing, the rental terms vary a lot between these different types of property. For instance, because of what’s typically included with the rents for these different property types we could be looking at a rental market where expenses will eat up to 40%+ of the gross income (apartments and some types of office rentals), or it can be below 5% (for many of the retail leases).
Then there’s vacancy. Between owner-users and rental tenants, vacancy for SFRs normally runs very low. Flippers have apparently changed this vacancy rate in the last couple years, but prior to that homes just didn’t sit vacant for 6 months at a time. On the other hand, many of the office markets have vacancy rates that have been varying between 5% to as high as 30% depending on what and where. That’s a huge spread.
By the time you get to considering all these different variables, it’s easy to see why rent multipliers and capitalization rates vary by property type regardless of when in the cycle you’re looking at them. Heck, even among the same property types they tend to vary somewhat by size ranges because of the different motivations and criteria used by buyers at different pricing levels.
That’s why using gross income multipliers as a measure of value is sometimes like trying to use a spoon to make surgical incisions. They’re often used by lay people because they’re quick and easy, and to the extent they’re used on properties that are that quick and easy to compare they work okay. But many of the property types are not so simple, which is why the appraisers and investors use other tools and measure the income after taking out vacancy (Effective Gross Income Multipliers) or after all expenses (Net income Multipliers or Cap rates) or even after all debt service and tax liability is taken out of the income stream. As a general rule of thumb, the more of these variables we can reconcile out of the income stream, the easier it is to compare the apples to apples.
At this point we’re getting far away from how this discussion started, which was comparing GRMs for houses to their respective sale prices. I hereby declare this an official tangent. Discussing and comparing GRMs for SFRs is complicated enough without making it more so by dragging in disparate property types for comparison.