What should you look for when vetting a property?
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.
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.
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.
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!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.