Due diligence and preparation are necessary if you’re interested in investing in a multifamily commercial property. In this blog, we list all the essential factors to consider before you pull the trigger.
Checklist of initial questions to ask before buying Multifamily Property
Thanks to the internet, it’s easier than ever to find information about interesting multifamily properties without having to go there yourself—at least not initially. Here are some of the questions to ask as you do your online research about a building:
1. Economic activity in the neighborhood
- What kinds of retailers in businesses have moved there recently? (i.e., chain coffee shops, etc.)
- Has there been a history of job growth in the area?
- Are there other real estate investors buying or building in the neighborhood?
- How many are other multifamily buildings listed in the same locality?
2. General attractiveness of the property
- Can you find tenant reviews online about the building you want to buy? What are they saying?
- Are their hospitals nearby? Military bases?
- Are there nearby universities and colleges? What are their average enrolment numbers year-over-year?
- What amenities in the immediate area make the neighborhood attractive?
- Is the neighborhood within an opportunity zone?
- Is it in an earthquake/seismic zone or flood zone?
- Are there historical weather issues and/or recent natural disasters?
- What is the crime rate? Have there been any crimes at the property itself?
3. Demographics
- What is the median age of the people living there?
- What is their median salary?
- What is the average cost of living in the area?
- Is the neighborhood gentrifying?
- What has been said about the locality in the media?
4. Viability
- What percentage of the average renter’s income goes, or it’s paying their rent? (A lower rate suggests more financially stable tenants.)
- How much are comparable properties renting for on a per-unit and a per-square-foot basis?
- How much are comparable properties selling for on a per-rentable-square-foot and a per-unit basis?
- How have multifamily properties in the area appreciated year-over-year? Is it the top of the market, or is there room to grow?
While it is possible to get valuable data about a property online, you also need to physically see the property and explore the neighborhood to get more in-depth information. Be prepared to ask these questions:
- Would you move here yourself? Why or why not?
- What is the reason the seller has listed the property?
- Are there any problems, such as title issues?
- Do you know anyone who lives in the area and can share intimate market knowledge?
- Can you talk to the current tenants and ask them what they think of poverty?
- Are there any local businesses or spots that have been in the area for decades? Talk to their owners, patrons, and staff. What do they say about life in the neighborhood?
- Should you decide to go ahead with this purchase, how will you finance it?
- Do you have an exit strategy, and is it realistic?
Due diligence checklist
Once you’re more confident of your interest in a multifamily property, it’s time to take things a step further and start the process of due diligence. Here’s a checklist of factors to look at.
5. Mechanical inspections
Have the central systems—including plumbing, heating, air conditioning, and electrical—checked by certified professionals. These systems can be costly to replace; they may eat up your entire repair and maintenance budget if they turn out to be in poor shape.
6. Financial audit report
Done by a third-party property consulting business, this type of report is an in-depth analysis of the property’s operating history. It also analyzes all the individual components of the asset’s expenses and operating income.
7. Property market report
This is a detailed comparison in contrast to the market to which the property belongs. The building is compared to similar properties and is assessed using rent price, occupancy rate, historical statistics, building age, unit type, amenities, etc. You can use the outcome of this report to confirm rental rates.
8. Lease audit
A lease audit involves a formal review of all the leases in the property. It also consists of an analysis of the expense figures, stated income, lease language, and billing methods. Its primary purpose is to verify that all billings are accurate and are compliant with the lease terms.
9. Service contracts
It’s important to review all service contracts, including contracts for pool cleaning, window cleaning, trash removal, lawn mowing, etc. Such agreements are likely to be maintained even after a new owner has taken over, making sure you understand them.
10. Utilities
It’s a good idea to confirm all the utility bills—such as electricity, water, and gas—that you will be responsible for as the new owner of the property.
11. Marketing materials
Ask for a copy of the previous owner’s marketing materials so you can see what worked and what didn’t. This will help you sell the property to your target tenants better.
12. Certificate of occupancy
Get a copy of the certificate of occupancy for all the buildings in the property, plus copies of additional building permits and licenses required by law to purchase, operate, maintain, and manage the real estate asset.
Financial & operational checklist
If you’ve ever bought an investment property before, then you know that finances and operation processes are some of the most important in making property viable. Here are some things to consider before buying that multifamily building:
13. Cash flow and appreciation
You want to ensure that the multifamily property will bring in enough cash flow to be worth your while. To determine its lucrativeness, look at its income and expenses. Don’t make the mistake of being too optimistic; if anything, you should be conservative. You need a realistic financial picture to honestly decide if a multifamily property is a good investment or not.
14. Expenses
Please don’t underestimate the amount of money it will take to maintain a multifamily building. Be sure to account for property taxes, repairs and maintenance costs, utilities, insurance, and administrative costs.
15. Property management
Do you intend to hire a property manager, or will you be managing the multifamily yourself? If you plan to go the DIY route, make sure you have the time, skills, and local knowledge to devote to the task. Expect to be on call 24/7 for tenant issues and repairs.
16. Management processes
How will you handle tenants, leases, evictions, security deposits, and escrows? These tasks require specialized knowledge to ensure that you remain compliant with the law and professional in your property management.
We’ve covered many of the factors to look at before buying a multifamily property in this checklist. But not all buildings are the same; some may require a closer look at certain due diligence factors. The key is to ensure that you are well aware of all the things that may go wrong to adequately prepare for acquiring the multifamily property. Talk to a commercial mortgage finance expert if you need help to get a commercial multifamily loan.
