In this three-part series (Click here to read part one), we’re looking into factors that you need to consider before you purchase your first multifamily building to rent out.
In Part I, we considered factors in finding a building, and what to analyze. Here, we’ll get into a few more practical concerns you should plan for before you make that first multifamily purchase.
Let’s assume you’ve found a deal and the number analysis is promising. Before you sign a purchase contract there are some important issues you may want to include clauses for to give you the option of addressing:
Access to Records
The single biggest factor in determining the value of a multifamily building is how profitable it is. This is far different than single-family homes where the only thing that usually matters is sales prices. To determine the profit on a multi-family you need records from the owner/seller. If you don’t make getting them, and having time to analyze them, part of the purchase contract you’ll be leaping before you look.
Due Diligence Inspection/Period
Buying something without inspecting it is a fool’s errand. You want to make sure you have full access to look in every nook & cranny. Be sure any deadline for an inspection is tied to access being granted so the seller can’t terminate the deal by stalling access. Have a building inspector with decent credentials inspect the building. Yes, this costs money and takes time, but if you don’t get it done and it turns out that the building has undisclosed problems it could be a financial disaster for you.
Make certain that every unit is individually inspected — every basement, attic, cupboard, closet, crawlspace, crevice, and cranny. Visit the local courthouse and ask about any violations, open permits, and/or special assessments related to the property; that will not only give you further ideas of where to look for potential problems, but will also give you an idea of how responsible the previous owner was.
Deferred Maintenance, Inventory & Contractors
It’s important to know what exposure to deferred maintenance issues you’re assuming before you buy. Motivated sellers are often motivated because they’ve been milking a property for cashflow and ignoring expensive maintenance issues like roofs, parking lots, heating and plumbing systems. What do you think will happen if you buy a building with a ton of deferred maintenance issues that start unexpectedly popping up?
Go through the building maintenance rooms and see what’s in them. Sometimes, you’ll find surprisingly valuable assets that will help you save some cash once you get started. More importantly, you may see evidence related to ongoing maintenance issues. For example, if you find a lot of half-used cans of roof tar it probably means a consistently leaky roof.
Similarly, ask for a list of every contractor that currently services the property, be it garbage, landscaping, janitorial, snow clearing, pressure washing — all of them! Not only will this give you the opportunity to decide whether or not you want them to keep working for you, but it will also let you contact them and discuss what they know about the property — a valuable source of information for any buyer!
Evaluate the security of the building and analyze if it’s adequate. Are there buzzers & intercoms and do they all work? Security cameras? If there are none, would it make sense to have them – both financially and for security? Not only do you want to provide your tenants with a safe place to live so they stay, but you want to protect your investment and cover your liability as well.
Research the crime rates in the area. Crime rates can be a great way to learn what kind of neighborhood the building is located in — also, what kinds of security will be most appropriate for it. If the neighborhood is more prone to burglary than mugging, for example, you’re going to want to focus on locked doors and buzzers than you are on security guards and cameras.
Tenant Profiles & Turnover
Where the building is located may dictate the type of tenants most likely to want to live there. For example, if you’re purchasing just across the street from a community college, you’re going to get mostly students and thus mostly parties, beer, and lots of empty pizza boxes. Or if you’re purchasing near a busy business park, you might get more young professionals.
Review any rental applications you can get from the owner for the current tenants. Walk the hallways posing as a prospective tenant and observe who the tenants are. Talk to current tenants and ask them what they think of management. Listen and you may hear things that reveal tenant related issues – screaming, profanity, loud music, unattended dogs barking, etc. If you plan to raise rents and enforce ignored or new policies, it’s highly likely a percentage of the current tenants will move out or worse – stop paying and force you to evict them. This could have a drastic negative impact on your cashflow, even if it is necessary to improve your investment.
You’re going to have to consider the issue of pets. Every kind of pet brings its own problems with it; you have shedding, excretory issues, allergies, potential attacks, and more. On the other hand, if you can offer amenities that appeal to dog and/or cat owners, you can tap into market segments that strict no-pet buildings can’t. A single dog-walking area that doesn’t require poop pick-up, for example, can help you fill several units with renters that love their puppies and are willing to pay higher rent.
The tenants can also be one of your best sources of information about the property. Ask the current owner if they mind you sending out an anonymous survey to all of the current tenants, and have the tenants send those surveys straight back to you so they come in as unadulterated as possible. Ask whatever you like, but in particular, ask about problems with the property (and problems with the manager!)
We’re not done yet! Part I talked about the numbers; Part II about the property & people — Part III will be about the management decisions that can make or break a rental. Come back soon and check it out!