I’ve seen sub-8.0x gross on certain property types other than residential. I have one lending client that bases the value upon which they’ll lend at 7.0x gross. I think that’s being overly conservative and I know they’ve passed on a lot of profitable deals in this runup because of it, but I also know they don’t have problems with foreclosures or late payments.
I can think of a couple reasons why a single family residence or condo would routinely justify a higher income multiplier than commercial or industrial properties. For one thing, residential properties are subject to residential lending programs. This means they can qualify for 30-year mortgages with minimal downpayments and favorable interest rates; whereas a non-residential property (including 5+ apartment units) are subject to commercial lending programs. For comparison, most commercial loans are written at higher interest rates and get re-written every 5 years. The loan may be amortized on a 30-year rate but it comes due in 5, at which point it rolls over into a new loan at the prevailing interest rate, usually with additional origination fees. The increased demands on the mortgage side of the income stream result in lower returns on the equity side. Financing terms are one reason SFRs tend to show higher rent multipliers.
Another reason is that, just as they say, a house can always be used for shelter. Not so with a commercial property. A commercial property has no utility to a failed company, except as a disposable asset.
Yet another reason is that the price point for investors is much lower for a house than for an investment-grade commercial property. Simply put, more people can participate in that particular game because of the lower prices and the larger number of available opportunities.
For these reasons (and others) I’d be surprised to see housing and non-residential properties ever working off the same rent multipliers. There’ll always be some relation between the two, depending on the economy, but there’ll always be a spread.
