Vetting a Multifamily Property? 3 Questions to Ask Before You Invest
What should you look for when vetting a multifamily investment property to buy? It may seem straightforward to just rely on the numbers, but there are many moving parts. In fact, it's the moving parts that actually make or break the deal. Before you start the process, I recommend that you keep a checklist of items handy that you can reference each time you get ready to invest.
Here are three items that should be on your list of things to check.
How Can You Add Value to the Property?
Maximizing your investment requires that you're able to add value to your multifamily property in some way. Whether you do that by lowering the expenses or increasing the revenues, you should have a clear idea of what you can do. Some ideas for value add for a multifamily property include bumping up the rent, charging pet fees, providing laundry services, and billing back your tenants for utilities.
How Much Will You Spend on Renovations?
The second thing to include on your checklist is the cost of renovations. This is extremely important because once you buy the property, these costs will fall back on you. Namely, what you want to pay attention to is those big-ticket items.
For example, the heating and cooling. If the AC units haven't been replaced in a number of years, you'll probably want to fix that first. Even if the appliances haven't failed yet, if you know that they need replacing, just underwrite the deal with the understanding that it's a repair that you'll need to handle as soon as possible.
Another big-ticket item example? the roof. On a property, you might find that you have a longer period of time where you can wait before replacing it. However, if multiple patch jobs have already been done, just plan to replace it right away once you take ownership of the property.
Are Your Numbers Realistic?
As you look over your plan, make sure that you've made accommodations for changes. For example, if the property is currently under construction it might have a slightly lower occupancy rate than when those renovations are finished. Furthermore, demand may increase for newly renovated units versus older ones. Just go in with the understanding that nothing is set is stone and you must allow for some flexibility in your assumptions.
Finally, consider your return on investment. If you've decided on the revenue that you would like to push your property to and then add in the expenses, you'll be able to calculate that figure back into your purchase price for the property. At that point, you can then go ahead with submitting an LOI and contract. If the seller or owner isn't interested, then you'll be able to stick with your plan and walk away from the deal.
The most important thing is to avoid falling in love with a property. It is at that point that most people trick themselves into going ahead with a deal that will never pan out. They manipulate the numbers in their head and come up with fantasy scenarios where they believe that it might actually be okay.
Please avoid this mistake!