Multifamily Due Diligence for Class C property investors can be the difference between paying extra attention prior to the sale, or paying dearly for unplanned capital improvements after the purchase.
Matt Hawley with Multifamily Inspection Services, provides some insight to help investors avoid costly, unplanned expenses.
The Due Diligence clock starts as soon as you have a signed Purchase and Sale Agreement. Typically, the seller will agree to 20 to 30 days for you to inspect the building for its physical condition. This is your chance to determine the condition of all systems, and determine what expenses you need to plan for or negotiate away prior to sale. NEVER, NEVER, NEVER skip inspecting each and every unit.
Most Class C investors hunt for a property they can make improvements to that translate to increased value. Management, rent increase, renovations, add dog park, RUBS, charge for storage, etc all translates to an increased NOI, and ultimately a higher value.
Unfortunately, capital improvements like a new roof, plumbing, electrical and HVAC systems don’t give a boost to the rents. These are bare essentials included in a place to live, and therefore will not improve the operational value of a property.
Therefore, it is important for any new investor to recognize the physical condition of the property prior to sale, so they can plan and budget accordingly for the updates needed to the systems.
There are four primary building systems which are critical to the proper function of your multifamily property; Roof, Electrical, Plumbing, HVAC. For pictures and descriptions of each potential system, click here: What to Look For When Walking Older Properties.
A good roof keeps the water out and the inside dry and free from water damage. When inspecting the roof, look for any signs of improper installation. Inspect appearance, flashing, and the general condition of the roof.
Stains on a flat roof suggest pooling of water that can be problematic. If water is unable to properly drain from the roof, it will find seams and travel to places not intended causing potential damage on the inside of your building.
Get a professional roofing contractor to provide a condition report and determine the expected life left in the roof. When budgeting you should determine the cost of a roof replacement, and amortize this over expected life of a new roof and account for this amount to your annual capital replacement reserves.
Your electrical system can be the difference between affordable insurable or a non insurable property. For pictures of some problem systems,
There are multiple things to look for when inspecting a property:
If any of these conditions are present, you will need to either budget for the correction, or negotiate the repair or cost of the repair form the seller.
BIGGEST RISK: Each week I ask my guest what is the Biggest Risk they see that real estate investors face.
Not properly doing your due diligence. If you have deal fever and don’t fully invest the time, money and effort into your the property due diligence, you will pay the price.
Stress test your rents for what if there is a change in occupancy, etc. Will you be able to hang onto your property?
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