Questions to ask when touring a multi family

[Karolina Powell]

Looking at my first two commercial properties tomorrow (a 13 mixed use unit and an 8plex).  I have run numbers based on what they have provided but I'm worried I'm going to overlook something when I go to view them.  What are some important things to ask and look for in a multi family that might not apply to single family?  

Thanks

[AJ Wong]

Quote from @Karolina Powell:

Looking at my first two commercial properties tomorrow (a 13 mixed use unit and an 8plex).  I have run numbers based on what they have provided but I'm worried I'm going to overlook something when I go to view them.  What are some important things to ask and look for in a multi family that might not apply to single family?  

Thanks

 Hi Karolina, I meant to comment on your previous mixed use post, provided 50%+ residential and 85% occupancy should be several reputable lenders that can provide workable terms. 

Some common items to note: roof, electrical and plumbing, window updates. Separate meters..who pays which utilities..

Terms of leases and Estoppel certificates, any recent inspections, appraisals or capital improvements..

[Alecia Loveless]

@Karolina Powell I’m a huge fan for tenants paying their own heating. In your case it may be individual HVAC units. No matter what you don’t ultimately want to pay for a tenants AC or Heat because they have no incentive to conserve it. I’m in the process of switching my buildings to individual utilities in this regard. Be sure to find out who pays for this.

[Greg Kasmer]

@Karolina Powell - When touring multifamily properties I would suggest you be conscious of the following: 

- As Alecia indicated... make sure you understand how utilities are set up (individually metered, etc..)

- View the general condition of each unit. Do they need some "sprucing up" ($2-3k) to get market rents or do they need more extensive renovation. ($10+k)

- How is the building appear from the outside? Landscaping, lighting, overall appearance can impact the "first impression" of future tenants. 

- Are their ways to add other income streams to the building such as: washer dryers, parking, storage units, etc... 

- Also, spend some time before/after to drive by comparable properties in the neighborhood to understand your competition and the rents they are asking. 

Good Luck!

[Gino Barbaro]

@Karolina Powell

Dm me and I will send you our Four Step Questionnaire. The goal is not to get the right answers, it's to ask the right questions that will lead  to the answers.

Make sure to find the property manager on site and see if you can ask them some questions as well

Gino

[Chris Mason]

The listing broker is going to try and sell you on paying a price that makes sense given the projected or proforma rental income, a dynamic that is the equivalent of how the listing agent on a SFR might try to sell you on paying a price that bakes in future/anticipated appreciation, or "look at this home's potential!"

As a prudent buyer, you should strive to pay a price that makes given the current actual income and expenses. Those "projected" rents could be totally whimsical, the proforma could understate expenses, etc, and you're buying the apartment today. 

In reality there's often a meeting in the middle.

Before you get to far into it, make sure you have some sense of the financing. In particular, in desirable areas, for permanent/good financing, often 25% down doesn't cut it. 

Good luck!

[Karolina Powell]

Quote from @Chris Mason:

The listing broker is going to try and sell you on paying a price that makes sense given the projected or proforma rental income, a dynamic that is the equivalent of how the listing agent on a SFR might try to sell you on paying a price that bakes in future/anticipated appreciation, or "look at this home's potential!"

As a prudent buyer, you should strive to pay a price that makes given the current actual income and expenses. Those "projected" rents could be totally whimsical, the proforma could understate expenses, etc, and you're buying the apartment today. 

In reality there's often a meeting in the middle.

Before you get to far into it, make sure you have some sense of the financing. In particular, in desirable areas, for permanent/good financing, often 25% down doesn't cut it. 

Good luck!

 That is exactly what is happening!  "Rents can be raised and you can get another two units in" etc etc.  It is helping that I actually have lenders that won't loan on what they're thinking but I have a feeling it'll take some time for us to get to a middle ground.  I appreciate your thoughts!

[Chris Mason]

Quote from @Karolina Powell:

Quote from @Chris Mason:

The listing broker is going to try and sell you on paying a price that makes sense given the projected or proforma rental income, a dynamic that is the equivalent of how the listing agent on a SFR might try to sell you on paying a price that bakes in future/anticipated appreciation, or "look at this home's potential!"

As a prudent buyer, you should strive to pay a price that makes given the current actual income and expenses. Those "projected" rents could be totally whimsical, the proforma could understate expenses, etc, and you're buying the apartment today. 

In reality there's often a meeting in the middle.

Before you get to far into it, make sure you have some sense of the financing. In particular, in desirable areas, for permanent/good financing, often 25% down doesn't cut it. 

Good luck!

 That is exactly what is happening!  "Rents can be raised and you can get another two units in" etc etc.  It is helping that I actually have lenders that won't loan on what they're thinking but I have a feeling it'll take some time for us to get to a middle ground.  I appreciate your thoughts!

 I'm glad my crystal ball was working on the day I posted that. :)

[Sam Applegate]

@Karolina Powell

A great way to start is by having a property manager tour the property with you. They can point out everything they notice and give you estimates for operating the property.
I also like to include a couple of checks in my underwriting to make sure I'm being reasonable. For instance, I'd recommend understanding the average expense ratio for similar properties in the neighborhood. This helps ensure you're including all the appropriate expenses. A property manager can also help you with this. It depends what state you're operating in but often times they're ~40%.

[Adam Bartomeo]

My first question is - Are these number that you provided completely accurate? The answer 99% of the time is NO! Never trust anything that the seller or the selling agent says and always verify.

[Chris Mason]

Quote from @Adam Bartomeo:

My first question is - Are these number that you provided completely accurate? The answer 99% of the time is NO! Never trust anything that the seller or the selling agent says and always verify.

 I concur with that statement. I've noticed it's more true the smaller the deal. A 100 unit property is out of the realm where "suckers" operate anyways, so they are vastly less likely to put up fake numbers. Modest 8-unit property is in the realm where the "fool and their money" have not necessarily already been parted (...yet...), so they might try fishing for a sucker. But no one that stupid is going to ever get to the point where they are entertaining a 100-unit, so there's no point in trying to market to that person, they don't really exist at that scale (and, to they extent that they do, they aren't falling for real estate scams, they are falling for crypto/nft/blockchain/ai [+ next years buzzword, whatever that is] type scams). 

[Gregory Schwartz]

All good advice. One thing that got me was the age of the water heaters. Assuming each unit has its own. 

In the first year, I replaced 5 of 12 water heaters. It is fairly easy to note the age of the water heater and then figure $1000-1500 each for replacement. 

All my projected cashflow from year 1 gone in the blink of an eye. 

[Jeffrey Abraham]

Physical Property Inspection

1. Overall Condition: Look at the general state of the building, including the roof, foundation, windows, and exterior.
2. Common Areas: Inspect hallways, stairwells, laundry rooms, and other shared spaces.
3. Mechanical Systems: Check the condition and age of HVAC, plumbing, and electrical systems. Ask about the maintenance history.
4. Units: Visit as many individual units as possible to assess their condition and note any necessary repairs or updates.
5. Structural Issues: Be vigilant about signs of water damage, mold, or pests, which could indicate larger problems.
6. Safety Compliance: Verify that the property meets all local safety and building codes, including fire alarms, extinguishers, and emergency exits.

Financial and Operational Aspects

1. Rent Roll: Request a detailed rent roll to understand current rents, lease terms, and tenant occupancy.
2. Expenses: Get a breakdown of all operating expenses, including utilities, maintenance, insurance, property management fees, and taxes.
3. Income Verification: Ask for historical income statements (preferably 12 months or more) to verify the revenue.
4. Vacancy Rates: Inquire about the historical and current vacancy rates and how they compare to the market average.
5. Tenant Profile: Understand the tenant mix, including residential versus commercial tenants, lease lengths, and tenant turnover rates.
6. Property Management: Find out if the property is currently managed by a professional management company and if you will retain or replace them.

Legal and Compliance

1. Zoning Laws: Ensure the property complies with current zoning laws and inquire about any zoning changes that may affect the property.
2. Rent Control: Determine if the property is subject to rent control or other regulations that could impact income.
3. Permits and Licenses: Check that all necessary permits and licenses are up to date.

Value-Add Potential

1. Renovation Opportunities: Identify areas where you could add value through renovations or upgrades.
2. Rent Increases: Assess the potential for increasing rents based on market rates and property improvements.
3. Additional Income: Explore opportunities for additional income streams, such as laundry facilities, parking fees, or storage rentals.

Environmental Considerations

1. Environmental Hazards: Check for any environmental issues like asbestos, lead paint, or underground storage tanks.
2. Flood Zones: Verify if the property is in a flood zone and the implications for insurance and risk.

Questions to Ask the Seller

1. Reason for Selling: Understand the seller’s motivation to gauge the urgency and possible negotiation points.
2. Recent Repairs and Improvements: Ask about any recent capital expenditures and future planned repairs.
3. Tenant Relations: Inquire about the relationship with tenants and any ongoing disputes or issues.

Due Diligence

1. Professional Inspection: Hire a professional inspector to conduct a thorough examination of the property.
2. Appraisal: Obtain an independent appraisal to verify the property’s market value.
3. Legal Review: Have a real estate attorney review all contracts, leases, and legal documents related to the property.

By covering these aspects, you’ll be in a stronger position to make an informed decision about your potential investment. Good luck with your property visits!