What doesn't show up on paper?

Question

Something I picked up working with multifamily and commercial rentals, mostly on the project coordination side: the properties that looked great on paper weren't always the ones that did best.

For those of you owning multifamily/ commercial, what came up early on that you wish you'd known going in?

Any costs you didn't see coming, or problems that only showed up once you owned the building?

Diana Khan · Answer

@Daniel Vera, one thing I’ve seen surprise buyers is when the paperwork does not match what is actually happening at the property.

A building can look fine physically, but then you start digging and find old lease terms, security deposit issues, side agreements with tenants, work that was done without the right permits, or a use that does not quite match the records. Those things may not change the purchase price on a spreadsheet, but they can create a lot of work after closing. I agree with your point about walking the property. I just like to make sure someone is walking through the documents with the same level of attention too.

Denise Supplee · Answer

The little things can really add up, especially with an older property. A roof, HVAC, plumbing or electrical system may be working when you buy, but that doesn't mean it's going to keep working for years.

I would pay close attention to the age and condition of those major systems and make sure you have good reserves. The purchase price is just the beginning of what it costs to own a property.

John Leland · Answer

The impact the neighbors have on the neighborhood.

Henry Clark · Answer

OP what are your examples?

Mine would be property tax increases due to revaluation and increased interest

Costs due to longer period coming to market or hitting projected occupant levels.

Divin Kanyama · Answer

That’s an important lesson, @Daniel Vera. The surprises usually aren’t in the purchase price—they’re in the operations. Deferred maintenance, aging plumbing or electrical systems, insurance and property-tax increases, utility costs, tenant turnover, delinquency, and code or accessibility requirements can quickly change a deal that looked strong on paper. With commercial properties, tenant improvements, leasing commissions, long vacancies, and major HVAC or roof work can be especially expensive. The best protection is thorough physical and financial due diligence, realistic assumptions, and healthy reserves. A property with modest projected returns but dependable systems and stable tenants can outperform a “better” deal that leaves no room for the unexpected.

Rick Albert · Answer

One of the challenges on a deal I bought last year was that the tenants didn't follow the lease even though the PM said they did. Every state is different but apparently it isn't common to have sign estoppels, even though it is common here in California. We ended up with high turn over because the tenants didn't like it when we enforced the lease that they signed. The estoppel would have solved this while in escrow because the tenants would have been put on notice ahead of time. In this case, it was that the water utility was billed back to them. The previous management said they did it (although they admitted to missing a few times) but the tenants said they never paid it.

Daniel Vera · Answer

Great points! Routine/ seasonal maintenance on the big ticket items is overlooked so often. Thanks for sharing.

Daniel Vera · Answer

So true everything can seem okay from the surface but prolonged maintenance or taking shortcuts can add up and show up faster than expected. Unfortunately ive seen owners spend a lot of money paying for work to be re done that was supposedly done with permits. I totally agree through follow up in all areas is key!

Daniel Vera · Answer

Very true not something you can tell from the listing always important to see how the street takes care of there properties.

Daniel Vera · Answer

@Divin Kanyama All valid point that hold a lot of weight! The part about a property with modest returns but dependable systems outperforming a "better" deal is exactly what I've seen. Deferred maintenance was the big one on my end.

When small issues don't get followed up on, they turn into the expensive ones.

Not only physically but how it affects leasing/ vacancies when current and future tenant issues aren't resolved properly.

What doesn't show up on paper?

What doesn't show up on paper?

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