In our last post, we provided you with the steps that you need to follow for submitting an offer on a multifamily property including steps to follow like due diligence.
For today’s blog post, we’re going to dig deeper into the importance of “due diligence” and the steps that you absolutely must follow before you submit an offer on a multifamily investment property.
What Is Due Diligence?
The simplest example of due diligence is doing your “homework” before you make a decision to buy an investment property.
This is the most essential part of investing in multifamily properties because without due diligence you’re essentially investing blindly and have no way of knowing if a property is going to be the right one for you to invest in or not.
If you’re planning on investing in your first multifamily property, or are getting started with investing for the first time, here are the things that you should be looking for before you invest in a multifamily property.
Due Diligence Checklist:
Step 1 – Learn more about the area – Regardless if you’re buying a multifamily investment property in your city, or out of town, you should first learn more about the area where the property is located and confirm what’s really happening there.
- Is the area rundown or doing well?
- What’s the job market like?
- How close is the multifamily property to public transportation?
- Is the area walkable? Close to shops and stores?
- How is the crime rate?
- What are people saying about the area online?
- How are property values in the area? Are they up or down?
Thankfully, you can do a lot of research about an area online by reading forums and blogs, just make sure that you’re actually reading posts that are written by people who live there.
Step 2 – Calculate Your Expenses and Costs
Besides getting financing for a property, you should also calculate your expenses and other costs before investing in a multifamily property. Some of the expenses that you can expect to pay include insurance and any repairs or deferred maintenance that the property may have which will have to be taken care of after you purchase it.
After reviewing your expenses and costs, you should absolutely weigh your pros and cons for purchasing the property because if it doesn’t look like it’s a sensible investment, you shouldn’t hesitate to walk away and invest your money into a different property.
Step 3 – Get Multiple Financing Bids
Once you’re ready to move forward with submitting an offer on a property, unless you intend to pay cash, you’re going to need financing.
During the process of getting the financing, you should always get multiple bids for financing because the best interest rate always wins.
Sadly, studies have shown that many investors only get two bids for mortgage financing before they purchase a multifamily property when it doesn’t take that much more effort to get just a couple more bids.
Always take the time to get multiple bids for multifamily financing because paying 0.5% to 1 percent more in interest can mean the difference between paying thousands more or less during the lifetime of your mortgage loan.
Step 4 – Be Ready for The Appraisal
Appraisals are essential, especially when purchasing multifamily properties because they essentially cut through the crap and eliminate the possibility of an owner inflating the ROI or value of their property.
If you live in the same city where the property that you plan on purchasing is located, you shouldn’t hesitate to be there when the building is appraised because it’s a process where you can learn a lot about the inner workings of your multifamily property.
Step 5 – Time for Inspection
After the property is inspected you will also need to have it appraised. This is another important part of buying a multifamily property because you’re going to want to know what’s really going on with the property.
Depending on the age of the property, you’re going to want to find out if the property has led based paint, asbestos, radon gas or defective drywall that may need to be replaced before tenants can move in.
Pay Close Attention to The Financials
Yes, following the due diligence checklist is important but it’s also equally important to make sure that you’re making a sound financial investment that will pay off for you for years to come.
Here is the financial data that you should analyze as part of your due diligence:
Rent Roll – The rent rolls will show you how much money is due from each tenant on a monthly basis, the total amount received and most important of all, if the money that’s due actually matches up with the amount that the tenant has to pay in accordance with their lease.
12-Month Property Operating Statement – This data will show you how the property has performed over the last 12-months and it’s going to be the very best way for you to cut through any hype about the property to see how it’s really performing.
Tax Bills – Take the time to review the tax bills for the property and calculate how much they may go up after you purchase the property.
Leases – Always review every lease to confirm that tenants are paying the exact amount that they are supposed to pay each month. You should also verify that there isn’t any “free rent” or arrangement that the current owner has made with a tenant who has fallen behind.
Services – Are there services that tenants will expect you to continue providing after you purchase the property? This is important to verify because you may find that the owner is offering more services that you will have to cover once you take over the property.
Delinquencies – Besides doing everything we’ve recommended in this article; you should also verify that there aren’t any units that are in arrears because having to start out with some tenants in collections isn’t a great way to start with a new multifamily property.
Remember that all the words due diligence really means is homework. You should always make the effort to do your homework before buying a new multifamily property because it’s the very best way to protect your best interests as an investor.