Landlording & Rental Properties

3 Questions to Ask When Vetting a Multifamily Investment Property

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
230 Articles Written
exterior of large apartment building with black and orange brick and white trim

What should you look for when vetting a property?

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

It’s very simple, but there are tons of moving parts. To add to the pressure, messing up this step could be a make or break for most people.

I recommend going through a checklist of items. In the video below, I’ll walk you through a property and show you what’s on my list of things to check.

How to Vet a Multifamily Property

1. Where can you add value?

The first step is looking at the value that you can bring, whether that is pushing down the expenses or increasing the revenue. You can do that by bumping up rent at a multifamily property, offering laundry services, billing back the tenants for utilities, or even charging pet fees.

Related: 5 Affordable Ways to Add Value to Your Rental Property

2. How much will renovations cost?

The second thing is determining what your renovation costs are. Yes, you need to determine this because that’s going to translate to you once you purchase the property. So for my company, when looking at this, we looked at the big-ticket items.

For one, we considered the AC units. When looking at this property in the video, the units are actually older than I am! To deal with this, we underwrote the deal knowing that we’re going to replace those AC units once we take over the property. The majority of them are not necessarily down, but they’re on their last leg.

Something that came up in the inspections was that they’re not a safety hazard at this point, but they need to be more properly secured. So there was a significant amount of cost that was associated with that.

And then also the roofs. That is a huge item! So on this property, it was lucky that they have a longer duration of time and that they were recently replaced. So that’s not a huge issue. But if you have one property that you’re purchasing where it’s been patched multiple times, there may be a blue tarp, then you should factor in that you’re going to replace that once you take it under ownership.

apartment-complex

3. Do the numbers make sense?

Walking through this property, I noticed some other things that you can look for when you’re doing the underwriting on a deal and vetting a property. For instance, right now we’re getting through the construction on this property. When this was bought, it was 60 percent occupied. Since then, we’ve been able to push it a little over 70 percent.

That was due to the fact there were tenants who were moving out once we took over possession. We’ve been changing others to the upgraded units if they qualify. So right now, the demand is there for the units.

One thing that we also noticed was the mechanical, so that's one thing you also want to take into consideration. Quite a bit of them had older furnaces. That's a huge expense—about $1,500 to $2,000, depending on who the contractor or the vendor is.

Related: Single Family, 2-4 Unit Multifamily, or 5+ Unit Multifamily? Explore the Benefits of Each Here!

Then the last thing is determining what your return on investment is going to be. If you figure out your revenue that you’re pushing your property up to and then factor in the expenses, you can calculate that back into your purchase price. And then that’s where you can move forward with submitting an LOI, a contract, and then if the seller or the owner is not interested, then you just gotta stick to your numbers and step away.

I would say, from personal experience, falling in love with the property can be dangerous. Because that’s what most people run into. They try and manipulate the numbers and say, “OK, well I can actually push up the rents even more or push up the income even more to be able to get to pay a little bit more for the property.”

Please avoid that at all costs!

What other items would you include on a checklist? 

I’d love to hear from you below in the comment section!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling w...
Read more
    Andrew Jones
    Replied 10 months ago
    I will suggest windows and doors are inspected, broken windows , old windows that don’t close & lock properly & bad doors will cost more to heat & cool if unchecked.
    Ty Head
    Replied 7 months ago
    Thank you for this informative information. My wife and I are looking at various small multi family homes this will help us even more “dig deeper” into the process.
    Chloey Mayo
    Replied 3 months ago
    This is such a good one, Sterling. I am purchasing my first duplex soon, and I know that no matter what, there will be a need for reno. You can never truly know everything, but I'm thinking that if there are tenants there, it must mean that at least the majors are in working order.
    William J. Morgan Rental Property Investor from Roanoke, Virginia
    Replied 3 months ago
    Great information and thank you for the insight and your experience on vetting these properties!! Looks like that project is going to take some time but once done will be great iam sure !