Newbies: Don’t Forget These 4 Areas When Evaluating Multi-Unit Deals

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During a recent dinner out with family, my brother-in-law turned to me to tell me about a deal in his local community he was considering purchasing. As he shared details about the mixed use property, I could hear how excited he was. He asked me if I would go with him to walk the property immediately following dinner.

So we met the owner, and she walked us through the space. She used to have a flower shop in the commercial space and had decided to close her shop down. This comprised the first floor, and the second floor was a 4-bedroom apartment, which was currently rented by college students. She provided a very thorough walk through of the property. We asked a ton of questions and thanked her for her time.

When we got back to my sister’s house, my brother-in-law and I stayed up and chatted about the deal. He told me that the property cash flowed a few hundred dollars a month so it seemed to be a good deal. I then proceeded to ask a bunch of questions about the market, the property expenses, and competition.

After our conversation, he decided to pass on this deal. The deal was probably not going to make the cash flow that he was originally projecting it would make. On my way home the next day, it hit me that many newbies miss many important areas when analyzing deals — especially multi-unit deals (multi-family and mixed use). I wish I knew these areas I am about to share with you when we began many years ago. We probably would NOT have purchased some of our earlier deals!

Related: Thinking About Buying a Multifamily? STOP! Wait Until You Read This!

Here are some important areas that you don’t want to miss when evaluating a multi-family property.

Newbies: Don’t Forget These 4 Areas When Evaluating Multi-Unit Deals

1. Management Fee

Back to the mixed use property I was telling you about earlier — as I shared, my brother-in-law said that the deal would cash flow a few hundred dollars. My first question to him was, did the current owner list a management fee in expenses she sent you? I then followed with, did you add a management fee in your evaluation of the deal?

He said he did not since he would be managing the property himself. After all, he lived within 10 minutes of the property. I challenged him on this. I told him this could change. What if he decides one day that he is no longer interested in managing the property? Or he moves away and it becomes too difficult to manage the property? Your expenses should always include a management fee whether you self-manage or pay someone else.

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2. Capital Expenditures

Think of capital expenditures as “long term” investments in your property. Examples may include a new roof, new hot water heater, new electrical, new appliances, new rugs, and the separation of utilities. These are typically higher dollar investments in your property.

If you are purchasing a multi-family that has not been completely renovated recently, then you will need to evaluate the level of capital expenditures that will be needed. Most new investors don’t estimate enough money for these capital expenditures. If you have a motivated seller and someone who has owned the property for a long time, chances are there will be some deferred capital expenses. This should not deter you from purchasing the property. Just make sure you budget correctly for these areas!

Related: Multifamily Myths: 5 Reasons Investors Think Multifamily is Easy to Value

3. Maintenance

I wish we ran the numbers for potential deals with an appropriate number for maintenance when we began. However, as the old adage says, you don’t know what you don’t know! I recall assessing some of our first multi-family purchases by using the current owner’s maintenance numbers. These numbers were very low per unit, so we were excited because the deal made great cash flow based on our numbers. Well, we owned these units for 10 years, and I can tell you the maintenance expenses always averaged more than the expense line the previous owner told us.

The key with maintenance is to assess the condition and age of each unit and the building as a whole. You also should know what the typical maintenance number is per unit for the market you are buying the property in. This will help you evaluate the future expenses of potential deals even more accurately. In our market, it is $400-600 per unit per year for a B-class property. So we use our estimated number in our assessment of deals versus the previous owner’s numbers.

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4. Utilities Paid by Tenant and Landlord

This might seem really simple, but this is big one. You can have two properties in the same area being sold for the same price. Same rent roll, same exact condition. However, the utilities in one building are separated and paid by the tenant, while in the other building the utilities are not separated and paid by the owner. This difference will certainly change your expenses and thus change your cash flow and ultimate return on your investment.

Make sure you get specific utility expenses from the owner. Once you receive them from the owner, conduct some research to ensure these utility costs are accurate and aligned with the local market. I would even go a step further and find out what the cost would be to separate utilities in your prospective deal. It’s great to assess this up front before you purchase a property.

I hope you found this list to be helpful. Obviously, this is only a sample of the areas newbie investors overlook. What other areas do investors often miss when evaluating multi-family deals?

I would love to get a discussion going!

Please share your comments below.

About Author

Elizabeth Faircloth

Liz Faircloth has been managing and investing in real estate since 2004, along with her husband, Matt. We have built our business from scratch and now own over five million dollars in residential and commercial assets. We love to help and educate investors. Our YouTube Channel, The Landlord’s Chronicles, offers short, yet educational videos that covers topics such as flipping houses, rentals, rehabs, property management, and lessons learned along the way. http://www.youtube.com/c/DerosaGroupTrenton

25 Comments

    • Tim Dolan

      Very good article.

      Back when I was a new investor. I used to go to every meeting of the local zoning board of adjustment. I called myself a ZBA groupie. Now that I am a real estate agent, I read the agenda and minutes for the ZBA and the planning board. This gives me the pulse of what is happening in the community.

      In the hot sexy days of the early 2000s. Typically every meeting, someone was presenting a case that they bought a three family unit but it was only approved for a two family unit. Or they bought me two family but it was really only a one family. also request for parking was ongoing topic. Where the owner thought that they had sufficient parking but the board said they did not . Then all the neighbors in the area would pile on saying how they did not want it.

      Quite often the new owner was rather disappointed ??. Tim

      • Elizabeth Faircloth

        Tim,
        This is also a great idea. The zoning officer in a community is a key person. We are currently considering the purchase of a 8 unit. However, based on the listing, we are not sure if the city has this property zoned as a 8 unit. We have had our share of deals where we had to get zoning and planning boards involved. In some cases, this has been worth it. In other cases, we should have passed on the property in the first place! Thanks for sharing!
        Liz

  1. Andrew Syrios

    Capital expenditures are really important. A lot of people just take the operating statement and think that that is that. But it’s really important to note that there are recurring capital expenses (i.e. HVAC) that need to be accounted for. And some owners put things in CAPEX that really should be expensed (I see turnover there from time to time) and that needs to be figured out.

    • Elizabeth Faircloth

      Andrew,
      Terrific point. I see that as well – owners putting things in as CAPEX vs expenses and vice versa. Very critical in both due diligence phase as well as when the property is acquired etc. Just wanted to thank YOU for all your terrific blog posts on this site!
      Thanks so much for commenting!!
      Liz

    • Elizabeth Faircloth

      Norm,
      I can’t agree more. Even in many Pro-Formas that I have reviewed, they might just account for vacancy at 5%. However, in some markets, this vacancy rate could be higher. Some of the markets we invest in are around 5% and some we add 10% to be more conservative. Great point and another area new investors overlook.
      Vacancy can kill a good investment!
      Thanks for sharing!
      Liz

    • Elizabeth Faircloth

      Bryan,
      I wish you the best with buying your first multi-unit property this year! If you buy a property that has both residential and commercial (storefront, etc), I would also recommend conducting market research on demand in the area you are buying. All too often I see investors buy a property in an area that has a residential rental demand but less of a commercial demand. Completely two different strategies and focus. Just something to keep in mind!
      All the best!
      Liz

  2. Tammy Richards

    Pest control, pest control, pest control. Depending on the area/income bracket you are renting to, budget in bed bug and other extermination costs. Look up your state laws, in my state landlords are required to pay for licensed exterminators, and this is a significant ongoing expense.

    • Elizabeth Faircloth

      Tammy,
      I can’t agree with you more!! We have been working with our pest control guy for over 10 years, one of our most trusted vendors we work with! We invest in a lot of older properties in an urban community. I can tell you that there is always a pest issue going on. Very important indeed!
      Thanks for sharing!!
      Liz

  3. Jamal L.

    Great article, if I were to add any other expenses to the equation it would be the water bill. In my area separate water metering is rare, yet it can also effect to NOI of your property. Also if the electrical meters are separate one should always look at the electrical bill for the common areas that are the owners expense these little fees add up when not accounted for.

  4. Jared Cali

    Great article! I am considering a 2 unit that is one commercial and one residential and this was very helpful in thinking through the numbers. I will be tweeting my numbers to account for management fees. Like your brother-in law I live in close proximity to this future property but I might not be forever. Great advice! Thanks for sharing.

    • Elizabeth Faircloth

      Jared,
      You are so welcome!! Congrats on making a move. So great to hear that it helped you. That is what this site is all about. I love how we all can help others on this site, and ask for help in areas we need it.
      Good luck with your purchase!!
      Liz
      PS: It might be helpful during the due diligence phase to interview some local property management companies. It is never too early to build a team. Also, they may have some market knowledge that will be helpful to you as you rent/manage the building!

  5. Casey Murray

    Great article, Elizabeth. The comments left by the BP community are great too. Although this is a more complex expense to consider, taxes should always be factored into the equation. A property that cash flows means profit and profit means taxes. This is where a CPA can help with sophisticated tax planning such as accelerated depreciation on capital assets to minimize taxable income.

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