What to watch out for Multi-Family Deals
Engineer · Reno, NV · Member since 2015 · 30 posts · 3 votes
Hi all,
I never purchased the multi-family investment and I want to get into this type of an investment.
I red numerous post regarding the multi-family, but I was wondering if I can get help on what to watch for in multi-family deals in following categories while searching or during the process of offering, or buying; financial standpoint (difference from SFR), structural standpoint (what to inspect), landlord standpoint, and repair standpoint.
Also if there is anything else I should watch out for while looking for or proceed to buy a multi-family property that does not fit above categories, please advise me.
Thank you so much for your time.
William Dorough
Hmmm ... where to begin ....
When you use the term multi-family above, are you referring to a conjoined wall residential property (2-4 units) or a true multifamily property (5+ units), as seen by HUD, Fanny/Freddy, CMHC and the majority of conventional lenders?
Residential properties are appraised and priced using comparable sales the same as a single-family residence (SFR). Conversely, multi-family properties are appraised using a couple of different approaches, but predominately are valued on the {net} income they produce - very much like any other business.
In the buyers shoes, you are looking for economies of scale with a multi-family property: one roof, one envelope, less vacancy risk, lower cost per unit, etc. In both cases, residential or multi-family, you make your money at the time of purchase - rarely can you achieve operational improvements that will offset a poor purchase.
When buying either a residential or multifamily, you need to formulate your exit strategy(ies) before purchase. With a residential property, particularly a SFR or duplex, you have the option of selling to a retail buyer (i.e. homeowner). With a multi-family, your buyer will be another investor.
The financing and purchase (close) will differ between residential and multi-family (commercial). Financing a residential property is very much like placing a mortgage on your personal residence - with a few small differences ... namely high-ration mortgages are not available on non-owner occupied properties. Just like your personal residence, the mortgage qualification will be based on your economic strength (income, DTI, assets, etc.). Building inspections and closing costs will also be like those on a personal residence.
Financing of a multi-family property will involve commercial lending. The good news is the qualification for financing will be based largely upon the financial strength of the property/business itself. The lender will be interested in your experience managing properties - or that of your hired management - and will examine your own financial strength to demonstrate you have some acumen and are not a fiscal basket case. Closing costs will be greater as you typically pay for the lenders legal, administrative, and closing costs. Building inspections can also be more expensive as most residential building inspectors are neither interested, nor qualified, to examine larger buildings and you may find yourself engaging engineering firms. You may also be requires to undertake an environmental assessment of the property by the lender (to prove there are no old USTs or other surprises waiting to ruin your, or rather, the lender's day).
Where you can often successfully purchase a residential property without using a buyers agent, an experienced commercial broker will be an invaluable player on your team during the purchase of your first few multifamily properties.
Enough rambling ... and I did not even get through the purchase processes ... must take the boy to daycare.
Hmmm ... where to begin ....
When you use the term multi-family above, are you referring to a conjoined wall residential property (2-4 units) or a true multifamily property (5+ units), as seen by HUD, Fanny/Freddy, CMHC and the majority of conventional lenders?
Residential properties are appraised and priced using comparable sales the same as a single-family residence (SFR). Conversely, multi-family properties are appraised using a couple of different approaches, but predominately are valued on the {net} income they produce - very much like any other business.
In the buyers shoes, you are looking for economies of scale with a multi-family property: one roof, one envelope, less vacancy risk, lower cost per unit, etc. In both cases, residential or multi-family, you make your money at the time of purchase - rarely can you achieve operational improvements that will offset a poor purchase.
When buying either a residential or multifamily, you need to formulate your exit strategy(ies) before purchase. With a residential property, particularly a SFR or duplex, you have the option of selling to a retail buyer (i.e. homeowner). With a multi-family, your buyer will be another investor.
The financing and purchase (close) will differ between residential and multi-family (commercial). Financing a residential property is very much like placing a mortgage on your personal residence - with a few small differences ... namely high-ration mortgages are not available on non-owner occupied properties. Just like your personal residence, the mortgage qualification will be based on your economic strength (income, DTI, assets, etc.). Building inspections and closing costs will also be like those on a personal residence.
Financing of a multi-family property will involve commercial lending. The good news is the qualification for financing will be based largely upon the financial strength of the property/business itself. The lender will be interested in your experience managing properties - or that of your hired management - and will examine your own financial strength to demonstrate you have some acumen and are not a fiscal basket case. Closing costs will be greater as you typically pay for the lenders legal, administrative, and closing costs. Building inspections can also be more expensive as most residential building inspectors are neither interested, nor qualified, to examine larger buildings and you may find yourself engaging engineering firms. You may also be requires to undertake an environmental assessment of the property by the lender (to prove there are no old USTs or other surprises waiting to ruin your, or rather, the lender's day).
Where you can often successfully purchase a residential property without using a buyers agent, an experienced commercial broker will be an invaluable player on your team during the purchase of your first few multifamily properties.
Enough rambling ... and I did not even get through the purchase processes ... must take the boy to daycare.
Well, I can give you one thing to beware of - making the building look too good by packing it with short term tenants who leave after you buy. I have about 93 units now, but I am still trying to extricate myself from one bad 7 unit deal. That property looked tremendous on paper - although in a small town, I thought it was a decent area near oil services. It cash flowed out over 20% CoC at 10% vacancy rate, and it was 90% full. I bought it.
In the 6 months after closing, tenants left one by one. Now I'm down to 25% full and going negative each month. I did not do enough diligence around the overall vacancy rate for the town - relying too much on the listing broker's description of things. Now I'm having to drop rents and scramble to fill it. I think the moral of the story is if you are buying in a area you don't know intimately - which often has to happen in multi-family especially if you are in an expensive area like Southern California, New York, parts of Texas...etc... - then you need to be REALLY careful about checking historical vacancy rates for the property, checking the supply and demand situation for the area, and studying the leases carefully.
As my CPA tells me, 'if a deal seems too good to be true, it usually is.' So - make sure on the multi-family side you do some serious diligence on the rental demand in the area before you jump in. Getting something for a high cap rate is great, but oftentimes there's a reason why that high cap rate is there. Best of luck...
@Roy N.
I meant to multi-family larger than 5 units or above, sorry that I may not have been clear on this.
Also thank you for advise. Do I need commercial broker? or can I use real estate agent who is experienced with multi-family property?
Thank you again,
William
Thank you so much for sharing me your experience.
I will do diligence and not rely on the financial information provided by seller.
At least area I am investing in is in same town I live, I know fairly well how much it rents for and how quick it fills.
Regardless, your post makes me more aware and tighten my minds to look into details of financial.
Thank you,
William
That's like saying - I'd like to find a wife...what do I look for?!
hahaha
Ben, when you have deep experience in multi-family, maybe it sounds like that.
What I was asking as as a beginner, what to look for, what's most important things to watch out for. Like saying, don't date a girl who seems to go on date with many other guys.
But, yes, I understand I am asking broad question. Just wanted to know what you guys pay attention during inspection, evaluation, and transaction.
Thanks,
William
Ben, when you have deep experience in multi-family, maybe it sounds like that.
What I was asking as as a beginner, what to look for, what's most important things to watch out for. Like saying, don't date a girl who seems to go on date with many other guys.
But, yes, I understand I am asking broad question. Just wanted to know what you guys pay attention during inspection, evaluation, and transaction.
Thanks,
William
It is very hard to even begin answering a question like this. Let me offer some generalized perspective. The success or failure of a RE investment is a function of DESIRABILITY, which needs to be considered from several perspectives:
A. Desirability to potential and existing tenants point t of view
B. Desirability from owner's point of view
C. Desirability from buyer's point of view
Every transaction is priced at a discount relative to lack of items on the desirability spectrum. Unfortunately, the rationale and the items on this list are endless, and putting this in a post such as this is a non-starter for me. But, hopefully this gets you thinking in the right direction.
Good luck, William!
Thank you for the direction.
This will give me a frame to think in the direction and research.
William
@William Dorough what I am constantly telling investors interested in MF. First get a good handle on the valuation of MF properties. If you do not know how to value a property, how are you going to know a deal if it hits you in the face. You will need to did through all of the poor deals before you find a good one. Don't rule out the deal just because the price doesn't fit. Offer the price that works for you.
Find a mentor to help you along the way. Don't ask an experienced investor to be your mentor. Ask them how you can help them, and be close and learn.
Funny that I just watched American Gangster and the head of the family was the driver and errand boy for the previous head for a 15 year period. Choose carefully who you mentor under. lol
Welcome to BP.
It will be difficult to answer your question as there so many areas that need to be covered. Agree with Ben here. Not trying to discourage, but if you could be a little more specific to your inquiry, you will get a more precise answer.
Hope it helps.
Jeff,
Thank you so much for emphasizing to offer the price that works for me.
Also I understand learning is very important matter in the real estate investing.
I will try my best to see who and how I can be help to experienced investors in my area.
Again, thank you for an advise.
William Dorough
James,
Thank you for letting me know.
I will try to be detailed as possible from next question.
Thanks,
William Dorough