Every multifamily investor at some point dreams about buying a multifamily property that they can purchase for a rock bottom price. The reality is that those types of properties are out there but many of them are going to be fixer-upper properties.
Even though fixer-upper properties may sound attractive to some investors, the big question you need to ask yourself is if you can really afford to make the investment of time and money before you get started with working on a fixer-upper property.
Is It Worth the Investment?
Even though the property may be “cheap”, the reality is that you have to ask if there’s a reason why the property has fallen into a state of disrepair?
To dig deeper into the property, it’s best to research the area where the property is located to find out things like if the area where it’s located has become economically depressed. Have the jobs dried up? Is there public transportation nearby?
Once you’ve taken the time to investigate the area where the property is located and found that it can be considered to be a prime location to own a multifamily investment property, the next step is to hire an inspector and or contractor to check out the property from top to bottom to see what renovations it needs.
If the property needs cosmetic renovations to get it back in shape then you’re lucky, but properties that have major issues that need to be repaired may be more difficult to finance.
Can You DIY Save Money?
If it’s your first multifamily investment property, and you have the skills of someone like Chip Gaines, it may be worth doing some DIY work yourself to get the property in shape especially if it’s going to help you to save money.
For bigger projects like structural renovations, electrical, or plumbing, it’s best to use the services of your contractors because there’s nothing worse than getting involved in a big DIY project only to realize that you literally bit off more than you could chew.
How Much Will the Renovations Actually Cost?
Before making an offer on a fixer-upper multifamily property, it’s best to find out what the renovations are going to cost.
Your contractor will be your “lifesaver” here because they will do a complete walk through of the property and provide you with a written cost estimate of all the work that they are going to do.
Once you find out the renovation costs, the next step is to verify if there is going to be permit costs as well. This is an important “hidden cost” that most investors don’t think about but the truth is that if the work is going to require permits, you have to find out how much those permits will cost and if you’re going to have to add those permit costs to the overall cost of fixing up the property.
Will the Property Require Structural Work?
Cosmetic improvements and minor renovations are one thing but if the multifamily investment property needs multifamily renovations that’s a whole different “animal” in itself. To verify which structural work needs to be done, it’s best to hire a structural engineer and have them analyze the structural issues that the property has.
The key to success with structural issues is to make sure that those problems can indeed be fixed because if they can’t be repaired, or fixed within your budget, you obviously should move onto buying another property unless you can purchase the fixer-upper at a very steep discount.
After verifying the structural issues and getting a cost for those repairs, the next step is to have a binding written estimate for those repairs before you make an offer on the property.
What Will It Cost to Finance the Property?
Unless you intend on paying cash for the property, you will have to calculate the cost of financing the property.
You should make your offer on the multifamily property contingent on you getting approved for financing because there’s nothing worse than closing on a fixer-upper multifamily property without having a loan in place to finance it.
Calculate Your Fair Purchase Offer
After doing your “due diligence” on a fixer-upper multifamily property, the next step is to calculate your fair purchase offer on the property. This can be done by taking the fair market value of the property then subtracting the amount of money that it’s going to take to rehab or repair it.
Your offer should also include inspection contingencies because you also want to have the property inspected for things like lead-based paint, radon, and mold plus any pest issues that it may have.
The goal of this article is not to get you to turn your back on buying a fixer-upper multifamily property, great fixer-upper multifamily properties are out there! The key to success when you find one is to do your “due diligence” by following the tips in this article because you don’t want to naively buy a property that looks like a great deal on paper only to find out that you’re investing in someone else’s headache.