13 Items to Check When Performing Due Diligence on Multifamily Properties

by | BiggerPockets.com

It is worthwhile to uncover these important due diligence points prior to purchasing a multifamily property.

When under contract to purchase a property, inserting contingencies into the document relating to inspections can mitigate your risk. In the event something is uncovered you did not originally calculate, then you can walk away.

This article will provide a list of items to obtain or further inspect during the due diligence period.

These are the most common items to focus on. Depending on the deal, you will want to check into other elements outside the items listed too!

13 Items to Check When Performing Due Diligence on Multifamilies

12-Month Property Operating Statement (T-12)

Don’t be fooled by what the numbers look like today or what they could look like tomorrow. The best predictor of future performance is the track record of how the property has performed in the past. This can also highlight seasonal fluctuations that you may miss, especially if buying in a new area.

Related: The Dark Side of the New Tax Reform Act for Multifamily Investors

Rent Roll

A rent roll is an account or schedule of rents, the amount due from each tenant, and the total received. Generally, you will find information in the rent roll on how long the tenant’s lease duration is. Ensure this matches the actual leases.

calculate-cash-on-cash

Real Estate Tax Bills

Checking property tax data can tell you a lot about a property. Check the status of current and prior year’s bills. The date they were paid can give you some insight to the motivation of a seller. Some county appraiser websites may also provide calculators to help you better gauge how much bills may go up after your acquisition.

Leases

Obtain copies of leases and ensure everything is in line with expectations. You want to make sure there is no free rent for some tenants at the back of lease and no leases that leave you seriously exposed as a landlord.

Services

What services might tenants have been promised in their leases that you have to live up to? For example, do you have to provide laundry appliances or internet? Are there leases on equipment or service contracts in place that you need to address, cut, or renegotiate?

Unit Inspections

A physical inspection of each individual unit should be done, along with common areas, utilities, and the exterior. You don’t have to personally do it, and it may not be worth your time if there are a lot of similar units. Yet, someone needs to do it, preferably a professional inspector, and clearly report on the condition and any issues.

Contractor Quotes

Don’t guess how much repairs and improvements will be, even if you have done similar work in the past. Obtain multiple quotes for large expensive items, and put together a scope of work for all improvements.

Market Analysis

Make sure you know the market. Commercial real estate investors tend to work with a much larger map than single family home investors. Make sure you know the micro and macro economics relating to a market. Ensure population and jobs are growing, crime is low, and the unemployment rate is below the national average. It’s also worth checking the diversity and strength of the local industry. Is it well-rounded or heavily reliant on one industry or employer—and could that industry or employer be in jeopardy?

multifamily-market

Related: 3 Easy Multifamily Renovations That Give the Best Bang for Your Buck

Competitor Analysis

Check your rental competition. How does this property stack up to others close by in terms of quality, rents, special offers, services and amenities management, and customer service? How will that impact your ability to keep and attract tenants?

Environmental (Phase 1)

If you plan to use financing—or ever hope to be able to refinance or sell to a buyer who needs financing—you’ll want an environmental report done. Lenders will require it. These aren’t always cheap or fast, so get it scheduled ASAP.

Demographics

Who are your tenants? Who will your tenants be for the next five to 10 years? What about shorter and longer than that? This can be used to double check viability and performance predictions, as well as help to hone your marketing and leasing efforts.

Pending Litigation

Be sure to check for any pending litigation. It can be quite common, even in relatively new buildings. Are there any pending lawsuits? What are the complaints? Are there structural issues? A bad management track record? Who will be on the hook for any compensation or judgements? How might litigation impact the ability to buy and close on the property?

Delinquencies

Are rents on time? How many units are in arrears? Are there balances due? What about collections? Verify these amounts, or you could be off to a challenging start.

Summary

Due diligence makes all the difference between landing great deals and being burdened with duds. Use this checklist to cover your bases. While these are the most common items to focus on during due diligence, depending upon the particular deal, you will want to look into other elements outside of what is listed here. Create your own checklist such as this one and make sure it is used every time you evaluate an acquisition.

What would you add to this list?

Comment below!

About Author

Sterling White

Sterling White is an investor and business owner on a mission to make the world a better place through principled and efficient real estate investment.

Even before co-founding Holdfolio, Sterling and his partner Jacob Blackett had been involved with the purchasing and selling of over 100 SFRs. Today, Holdfolio is a prominent platform for investing in income producing multifamily apartments. The firm has been featured in national publications such as US News and was ranked as one of the best real estate crowdfunding sites in 2018 by Fit Small Business.

The success of Holdfolio’s technology gave birth to SyndicationPro, a fast growing all in one software solution empowering investors to efficiently and easily raise capital online.

9 Comments

  1. Darren Quigley

    Sterling,

    Great article and looking forward to your webinar, one thing you forgot is cost segregation! Of the savviest investors I work with, they all have me run a preliminary analysis prior to purchase to see what they can write off the next 5, 7 and 15 years.

    Just a thought and it’s free!

  2. Brad Mast

    I am in Due Diligence on a 43 unit multi, so this article was timely & great. I like the link to the sample checklist and your explanation with tangible examples items for each of the checklist items.

    I hadnt considered the environmental phase 1 report, so learned something there.

    Question on the unit walk through; assuming we want 3rd party to conduct, would hiring a home inspection be sufficient or are there teams that specialize in apartment building inspections?

    One thing that can make or break larger multis are the on-site property management.
    Any tips to properly vet this future team member during due diligence period?
    I am guessing there is another bulleted list article somewhere on bp??

    • Sterling White

      It is best to go with a inspector who has completed numerous inspections on similar size property.

      Yes, there are multiple articles and threads covering the various ways to find a property management co. I use my own pm company so can not provide much insight.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here