Just starting to venture into the multi-family arena. I have solid experience on the SFR front but trying to understand what to expect when I tour my first apartment complex. I understand the financial analysis side. But what should I be looking for when touring a property? Will I be viewing a model...or various units (certainly not every unit)? Do you try to inspect roof, mechanicals during the first visit....or wait until the due diligence period?
Also, I know everything is negotiable, but what is a standard commercial real estate broker commission? I know typical on the residential side is 3% for each side. Is commercial typically higher?
The REALTOR fees will generally be the same with commercial or residential. That's because most REALTORS aren't very creative nor do they understand how to price their services.
Some thoughts off the top of my head:
- Roof pitch and condition, gutters and downspouts, drainage around the building
- Landscaping condition, maintenance requirements and potential costs
- Parking arrangements, number of available spaces, condition, future maintenance requirements
- Siding, windows, doors
- Security for exterior and interior doors
- Condition of shared common areas, quality of lighting, width of hallways or stairwells for ease of moving, cleaning and maintenance requirements
- Laundry room, condition of appliances, lighting, security (consider women or children alone in this area), smoke or fire detection
One problem I always run into: lighting in stairwells. Switches are in bad locations, motion detectors don't work because the stairs block the view, light sensors outside tend to get dirty or burn out, etc. Parking is another big pain for larger units where some tenants try sneaking in multiple cars, junk cars, trailers, etc.
@Tony Castronovo Look for obvious exterior issues, like foundation, wood rot, etc. You'll have to make do with visually inspecting the roofs from the ground as you won't likely get the option to inspect the roof. You can ask to see the model unit (if they have one) or a vacant made ready/upgraded unit and also a vacant non-upgraded unit. You won't likely be able to see any unit with tenants in there so definitely not all of the units. You don't do that until DD anyway nor would you want to. You should be able to see the mechanical room too.
If this is your one shot at seeing the property you can come with your GC, lender, and property management company or a combination of the above.
Also, unless you have a buyer's broker helping you (in which case you should be asking them all these questions), you generally shouldn't be paying any commission.
Thanks @Michael Le . I do have a buyer’s broker and have been asking plenty of questions. I’m looking to validate a bit and increase my perspectives.
The only time I could pay commission is if the seller won't pay. Certainly, they expect to pay commission. But what is the norm. On the SFR side it is normally 6%, with 3% going to listing agent and 3% to the buyers agent. Is it the same in commercial?
When I am touring, I look for ways to improve the performance of the building so I almost always start with the mechanical. The age of the heating and ac can be a big part of figuring your cap ex and the overall efficiency of the building.
When Inside the units I look at the ability to make cosmetic upgrades to increase rents. New fixtures, lights, ceiling fans Countertops/cabinets, flooring. Appliances. How much would it take to upgrade a unit and how much more could I get? Value add.. If there is an oppurtunity then I would dig deeper.
If there is any type of structural or roofing issues it would reflect in the offer. Or I would simply pass. These things do not improve your noi.
I would verify owner supplied expenses. I have yet to get actual. It is almost always some sort of b.s. performa. Demand actual!
@Tony Castronovo I just sold a 240 unit deal and I paid my broker 1.5%, the broker fees are lower than SFR.
Just curious, why are you using a buyer's broker? Reason I ask is most selling brokers don't want to share their fee so if a BB is involved, the selling broker might steer their seller to someone else.
@Tony Castronovo broker fees depend on the size of the deal. my investment sales team sees anything from 1% - 2.5% depending on the market, property, etc. the rate's are lower in MF, but the dollars will be much higher.
Great input @Peter B. ! Thank you. Anything else you consider, such as the property amenities?
@Brian Adams I have been investing in SFR rentals for about 3 years and have developed some great processes, systems, and knowledge. But the world of multi-family is new to me and figured it would be good to get some guidance. The broker I am working with seems to have good knowledge, experience, and connections that might benefit me.
I understand what you are telling me regarding the commissions...which is why I am asking here on BP. I know this is similar in the SFR space and I seldom have an agent represent me. I have not signed the broker's rep agreement yet...in part because she included a 6% commission, which seemed really high. I am concerned that the issue you brought up could in fact come to fruition. Of course most agents/brokers suggest that they can help you negotiate to help pay their worth. Typical? or should I run for the hills?
My experience with buyer's broker is about 1%, for such times as when a deal has been brought to me and the listing broker is not willing to share.
This is from my experience and the 2 cents I️ can offer. LOOK AT EVERY UNIT!!!
You may see the best and not realize that each unit needs (insert whatever you can think of), and could kill you cash flow for years.
If I️ were you I️ would want to see each unit.
@Cody Campbell , you look at every unit the first time you tour a property?
Look at the cars in the complex and consider the time of day you are visiting. If you are visiting after work hours then most likely a good # of tenants will be home. If they have decent cars or look maintained then that gives an indication of the type of tenants.
Look for security measures as well. Is there controlled access? Does it have barbwire or look like you need TNT to get into the property.
Look at the trash bin areas - Are they clean or full or overflowing of debris or waste? Indicates if the property mgmt company is doing a good job or not and the types of tenants.
This all will depend on what you call Multi-family. For a 2-10 unit building, you should look at most of the units at the initial walk through and look at most items in more detail. With a 50+ unit you will likely see 3-10 units, the mechanical rooms, common areas and basement. You likely won't get on the roof. Some things to ask the broker, would be the age of the mechanicals, age of roof, type of wiring, type of plumbing, condition of the units you did not see, etc. The more information you can get, the better. You also want to dig into the numbers that they gave you to ensure they are real numbers and not pro-forma.
After the property is under contract, you will complete due diligence, where you will see every inch.
Great stuff @Nathan G. !
Thanks @Todd Dexheimer . I’m looking for something around 20 units.
@Michael Dang I like it. It’s like the idea of checking out the restroom of a business to get a sense for how they run things.
@Tony Castronovo What to look for when you're touring depends (for me) a lot on the size. If it's 5 units, 7 units, etc. you can probably get in all or most of the units during a tour. It's not that tough. Now if you're dealing with 20+ units that's another story. You can probably then as to see units with each distinct floor plan. You'll know after the 5th unit how things are being kept up, if tenants are beating on the units, etc. And always assume that you're being shown the *best* units of the bunch with the nicest tenants. It's not 100% certain that's the case but I'd definitely assume that what you see is better than what you can't see. Just my two cents.
Anyway, I think what you'll want to focus on during a first tour are the big things. Does the roof look like it's in decent shape? Can you see water damage on the ceilings, floors, etc.? Do you think the unit layouts look okay? How is the surface of the shared parking area? Are there potholes you'll have to fill? Resealing parking isn't cheap... If you can go (since it's now fall) after it's rained you can look for pooling water, hopefully it doesn't pool against the side of the structure, etc.
Along with the "big things" you'll want to drive by/through the building in the morning, afternoon, night, and at 2 a.m. You want to get a sense of what's going on at the units. I don't know how you "quantify" that into a spreadsheet but I always do it. It's hard to judge "cars in the parking lot during the middle of the day" because you might have nurses, security guards, etc. living there that work off-hours. However, if people are roaming around with beer cans in their hand and cigarettes dripping out of their mouths at 2 a.m., well, you can decide what to make of that.
You'll get unit-by-unit issues detailed in an inspection after you have the complex under contract. You can pay to have the sewer scoped, etc. All of that, of course, costs money so I'm assuming you're looking for "what to look for" before having to come out-of-pocket.
Thanks @Andrew Johnson ! Your comment about water in the parking lot raises a much bigger topic. I'm in Houston and many areas were flooded. My inbox is full of SFR flood deals. Not sure if the same "stigma" on flood damage applies to apartments. My thought is that you still have all the same concerns regarding mold, etc. But tenants likely wouldn't be as concerned about renting? Could be some motivated sellers. @Michael Le what do you think about this or what have you experienced since Harvey?
@Tony Castronovo I don't know if you have it or not but the ABC's of Real Estate Investing by Ken McElroy is basically a blueprint for how to evaluate a multi family property. I did clip a lot of the information and make a one page cheat sheet, I can send it to you if you PM me.
Look to see if there is a sprinkler system in place - can have a big impact on insurance rates.
This post has been removed.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing