Purchasing a multifamily real estate investment has a few more complexities to consider than purchasing a single-family home. Here are some guidelines for evaluating the feasibility and potential profitability of a multifamily purchase.
Compare the Asking Price to Similar Properties
Every multifamily building is unique, but you’ll need to work with some frame of reference to measure the reasonableness of the asking price. In addition to local listings of what’s currently for sale, check out your local property assessor’s website to learn the most recently assessed valuations of comparably sized and located buildings.
Identify Encumbrances
Performing a title search will reveal if the multifamily real estate that you’re considering purchasing has any outstanding debts like mortgages, unpaid taxes, municipal liens, contractor’s liens, or title deficiencies. Finding hidden encumbrances on a property can make an asking price that seemed like a great deal suddenly seem a lot less appealing.
Evaluate Existing Tenancies
Sometimes landlords will let problem tenants stay on for too long, creating serious problems with accounts receivables. Ask to review all tenants’ leases and ledgers to find out about how much income the building generates, how consistently tenants pay rent, and what vacancy rates and turnover are like. Additionally, you’ll want to find out long before current lease terms expire to know how soon you would be able to effect rent increases.
Look at Ongoing Operational Expenses
Get as much information as you can about ongoing expenses like property taxes, utilities, and waste removal. Don’t try to estimate this information; work with solid records to ensure you won’t have any surprises after closing.
Plan for Contingencies
If the property that you’re considering purchasing will require any type of significant renovation, leave some breathing room in your budget for unforeseen expenses or change orders. In the field of capital needs improvements and repairs in multifamily real estate, almost nothing goes exactly according to plan. If your budget is already maxed out using best-case scenario projections, you probably need to reevaluate increasing your budget with a contingency line item.
Factor in Transactional Fees
You’ll need to budget for broker’s fees, attorney’s fees, inspection fees, title fees, and recording fees. Cumulatively, these extra items can add a lot to the cost of your initial investment.
A multifamily real estate transaction has a lot of different moving parts that require careful consideration. When you exercise due diligence to get all the information that you need, you’ll be well-equipped to decide if an individual property is right for you.
