During the years that you are investing in multifamily properties, you may come across a property that looks great on paper but is potentially in a bad location.
The big question is what do you do when these deals arise? Should you pass on them or spend the time investigating these opportunities further to see if they would make good investments?
In this article, we will answer these questions and provide you with tips for investing in a property that looks good on paper, but might be in a bad location.
How To Determine If A Multifamily Property Really Is In A Bad Location
Depending upon where you live, there may be without a doubt one or more locations that you would consider to be bad locations for buying multi-family properties.
Even though an area may look bad on the surface, the good news is that there are several things you can do to determine if an area should be classified as bad or not before you invest there.
Research The Area With A Crime Mapping Service
Thanks to the internet, there are a variety of websites that you can use to research the crime statistics for any given area before you decide to invest there.
Some of the most popular websites to use for researching crime statistics include www.cityprotect.com and www.spotcrime.com. Both websites are easy to use, all you have to do is enter the address of the property that you plan on investing in to receive a break down of crime statistics for that area.
Review The National Sex Offender Registry For Possible Sex Offenders In The Area
Another important thing to do before purchasing a new multi-family property that may be located in a bad area is to review the national sex offender registry at https://www.nsopw.gov/.
Yes, the United States Department of Justice sex offender registry is an invaluable tool that you can use to research the safety of an area and learn more about where potential sex offenders are located before you decide to invest in a property there.
With more families renting multifamily properties in this day and age, it makes sense to also check the national sex offender registry before you invest in a new property because you want to have confidence that an area will be safe for families that have small children.
Find Out How Many Homes Or Other Multifamily Properties Are For Sale In The Area
Besides using the crime mapping tool and sex offender registry online, another important thing that you should do before investing in a new area is to find out how many homes or other multifamily properties are for sale in the same area where the property that you want to purchase is located.
Multiple properties for sale at the same time could be a sign that owners are eager to escape rising crime rates or they want to get out of the area because employers are leaving and job opportunities are drying up.
Regardless of the reason why there may be multiple properties for sale in the same area, it’s always best to dig a little deeper into an area before you invest there.
Tour The Area To Review The Conditions
Once you’ve done your research online to determine if an area where a multi-family property is located would potentially be a good fit for you or not, the next step is to take the time to actually visit the area in person so that you could see for yourself what it’s really like.
During your visit, you should be paying close attention to the condition of the area including if other multifamily properties, homes, and businesses are in good condition or if they have broken windows, graffiti, and other signs that the buildings in the area are in poor condition.
Coming across one property may be acceptable to you but encountering multiple properties that are in a state of disrepair is a good sign that the area where the multifamily property is located may not be the very best investment that you can make.
Talk With People Who Live In That Area
We’ve offered you several tips that you can use to research an area to learn more about it before you spend your hard-earned time and money investing there.
Even though the methods that we’ve offered you are effective, one of the very best things that you can do is actually take the time to talk with people who live in the area so you could find out for yourself what it’s really like.
During your conversation with local residents and business owners, it’s best also clarify if they would recommend the area to people who are potentially interested in living there and if they have concerns about area safety or recommendations for people who are considering moving there.
You should also confirm if parents would be okay with letting their children play outside, walk to school, or take public transportation because these are all signs that they have confidence in an area or not.
How Involved Is The Community?
Even though an area may look a little “scary” on the surface, you should also find out how involved people are in the community because the level of involvement is also a sign that shows how people feel about the area that they live in.
Are there local community events listed online like block parties, farmers’ markets and things that bring people together? If so, this is a great sign and another indicator of the safety and security that people feel about the area they live in.
Another important thing to consider when researching a community is to find out if there are neighborhood watch groups because these groups typically report suspicious activity to the police and are an asset to the community.
What Businesses Are Already There Coming To The Area?
During the time that you spend researching an area online, you should also be learning more about the local business community to find out which businesses are already located in the area or planning on starting new locations there.
Are there plenty of shops and stores that are close by, or major brand stores like Walmart and Costco that are within driving distance?
Convenience means everything in today’s world since most people want to be able to access the shops, stores, and services that they need without having to drive 30 minutes to one hour each way.
Learn More About The Property
Once you’ve done your initial research into the area where the property is located, the next step is to find out why the owner is selling their investment property since this will help you to know if they are a motivated or unmotivated seller.
You will also want to find out if vacancy rates are high and if there is any potential for raising the rent after you purchase the property.
Would You Live There?
After doing some research, and due diligence, the last question to ask is if you could honestly see yourself living there. Many investors use this question as to the “litmus test” to determine if a property would be a good fit for them or not.
If your answer to this question is yes, but you still feel a little apprehensive about the property, you should find out if spending some money on improving the curb appeal of the property would make it seem “less scary” and more appealing to tenants who would be interested in living there.
Once you’ve researched the property and determined that it would potentially be an area that you would be interested in living in, the next step is to review the property itself to determine if it would be a good investment for you to make or not.
Every year many people who own multifamily properties choose to live in one of their rental units (house hacking) because of the obvious reason that the rental income from the other units will help cover the landlord’s own housing expenses.
Tips to Consider Before Investing in A Multifamily Property
Some of the important things to consider when investing in a multifamily property include:
Vacancy Rates – The building should not have a vacancy rate that’s more than 7-8%. Anything higher than this means that there may be other problems with the property that need to be addressed before you purchase the property.
Value-Add Opportunities – With every multifamily property that you review, you should always be interested in if there are opportunities to boost the attractiveness and rental rates of the property.
Besides improving the property, you should also find out if there are other things that you can do to boost income like adding coin-operated laundry or vending machines because these sources of “ancillary income” add up over time.
Do A Financial Audit – When doing a financial audit, you should ask for at least 3 years’ worth of trailing financials, one years’ worth of profit and loss statements, two years’ worth of tax returns and utility bills from the last 12 months.
A financial audit will provide you with all of the numbers that you need to “dig deep” into the financials of a multifamily property instead of going by blind faith in the numbers that you may have received from the leasing agent.
The reality is that even though the owner or sellers agent may have told you initially that the property has great cash flow, after doing a financial audit you may find that their claims just don’t add up.
Conduct Walk through’s of Each Unit – Before moving forward with purchasing a multifamily investment property, you will also want to conduct a walk through of each unit.
This is important because it’s going to give you the opportunity to speak with each tenant personally to find out which repairs their units may need.
The purpose of this article was to give you a strategy for reviewing a property that may have good cash flow but is potentially in a bad location.
From the tips that we’ve offered, you now have a plan for thoroughly researching an area to confirm if it’s going to be the right place for your next multifamily investment.
Don’t be fooled if a property looks good on paper. Always take the time to do your due diligence and your hard work will pay off every time.
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