Things to Ask for When Purchasing a Small Multi Family

7 Replies

Good morning BiggerPockets,

i'm new to investing and before the end of the year I am very serious about purchasing a few rental properties in Maryland, North Carolina, and potentially the Philadelphia area. This is a question for all of my real estate experts: When I'm looking at a multi-family property that has existing renters, I know I should ask for financials, but what exactly do I need and should I ask for? What should I be looking for on these documents?

Thanks and sorry for my ignorance. If I don't ask, then I don't learn. 

Hey there.

You want to see the rent roll and then also the P&L. You want to see the expense ratio, the property management fees. 

You want to see where you can add value to this property. 

Can you bring down the expenses? 

Can you increase rents to market? By how much?

All of these answers will help you know where you can add value and make the property worth more than you buy it at, which is important. 

@GreatTen Team. Immediately after getting an LOI or contract i request the following items....

Exhibit B

  • Inventory of property tools, supplies and personal property
  • Exhibit C

  • Service contracts including trash, laundry, extermination, lawn service, etc.
  • HVAC and/or boiler reports
  • Exhibit D

  • Property management license (if applicable)
  • Certificate of occupancy
  • Exhibit E

  • Certificate of insurance
  • Insurance claims history for the past 2 years
  • Exhibit F

  • Commission agreements with the leasing staff
  • Current property management contract
  • Any other vendor contracts
  • Other Requested Due Diligence Documents

  • Last 2 years of financial operating statements
  • A year-to-date operating statement
  • Last 6 months of bank statements
  • Utility deposit register
  • Utility bills for the last 2 years.
  • Property tax bills for the last 2 years
  • IRS Tax returns and addendums for the last 2 years (as related
  • to the property only)

  • Articles of Incorporation
  • Good Standing Letter from the Department of Revenue
  • Any licenses in the name of Sathyam Enterprises
  • Rent roll for the property for the last 2 years
  • Security deposit register
  • Payroll records
  • Each different lease type
  • Written property policies such as pets and parking
  • Information on all rent concessions
  • List of any uncompleted maintenance requests
  • Maintenance and capital improvement history for past 3 years
  • Litigation history on the property for the past 5 years
  • Any operation manuals for the property
  • Title policy
  • Site plan
  • Architectural plans
  • Environmental Reports
  • Any mold inspection reports
  • Any lead-based paint inspection reports
  • Any fire system reports or citations
  • @GreatTen Team

    The first thing you should ask for is the P&L (profit and loss statement) for the past few years at a minimum. Once you see the property condition and the numbers, your offer is generally calculated based on the expected cap rate in your area. As others mentioned, you start with an LOI for commercial properties 5+ units. For residential 2-4 units, most of these are purchased with a standard residential contracts. Always make sure your contracts are assignable for tax purposes (we use a form paragraph added to the contract, consult a lawyer for appropriate language), build in a study period and have contingencies laid out for release of documents and financial records of the property. In the commercial world, it is common to have long studies with timed release of funds to the seller in order to finish your due diligence.

    When you submit a contract to purchase make sure you ask for a copy of all the leases and an estoppel from all the tenants. The estoppel is an affidavit signed by the tenant which details their understanding of the terms of their lease. This eliminates any future disputes because "the previous owner and I had an agreement that......"

    Originally posted by @Mario Brown :

    @GreatTen Team. Immediately after getting an LOI or contract i request the following items....

     Mario, this is an excellent checklist! Do you use this for Residential multifamily or Commercial?

    @Derrick Ward this is specifically for residential multi-family. I would imagine a very similar list could be used for a commercial building due diligence period, with adapted terminology. 

    Okay thanks Mario!

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