Looking to buy a multi-family property?
Types of Multifamily Homes
Common multi-family property types included:
Duplex (2 units) – a property divided into two apartments, with a separate entrance for each.
Triplex (3 units) – a property divided into separate residences, each with separate entrances.
Quadruplex/Four-plex (4 units) – a property with four separate residences, with separate entrances.
These are all single-family homes that are partitioned into multiple units.
“The advantage of owning a multi-family property over a single home or condo is that you can subsidize your mortgage and housing costs by collecting rent from tenants. Now creating a revenue property.”Dana Ash-McGinty | ASH MCGINTY
Investment Real Estate Broker
Apartment Buildings (5 or more units) – The number of units in apartment complexes varies widely, as does the size of individual homes. From studio apartments to sprawling 3-bedroom rentals, a single property can offer a diverse set of floorplans that provide different rates of return for investors. The owner of an apartment complex is responsible for the cost of almost all maintenance and repairs.
Owning a multifamily property can be very lucrative, but it does come with obligations and responsibilities to tenants. These vary depending on the property type. If you’re considering purchasing a multifamily property, it’s important to consider these expenses when calculating the potential return on your investment.
Evaluating Multifamily Properties
Purchasing a multifamily property can be a great investment. However, there are many factors to consider when evaluating a multifamily purchase, including:
Location: Properties in an economically depressed area may be more affordable to purchase, but cash flow could be constrained. Conversely, purchasing a property in a more expensive area often requires a larger upfront investment with the potential for higher rents.
Up-and-coming areas may offer the best of both worlds for real estate investors – a moderate purchase price and steadily increasing rents.
Financial Performance: You should request a profit-and-loss statement and other financial documents when evaluating a property. Understanding how a multifamily property is currently performing is critical to arriving at a reasonable purchase price.
Condition of Units: Real Estate Investors must consider the condition of the individual units. Aside from influencing monthly rents or the sale price, older units may require repairs and remodeling to be marketable. Make note of those costs when calculating your ROI.
Local Housing Laws & Regulations: Each city may have different rules regarding rent control, eviction processes, etc. These regulations can put a ceiling on returns.
Ongoing Maintenance Costs: The owner of a multifamily property is responsible for the vast majority of property maintenance. Consider both the current and any probable future maintenance costs when analyzing a multi-family property.
Multi-family/Apartment Building Due Diligence Checklist
The due diligence process discovers critical information that might affect a buyer’s investment. It can save a buyer from making a bad investment and improve an investor’s ability to negotiate a purchase price.
Although buyers and sellers may both be involved in the due diligence process, the primary responsibility falls to the buyer to discover risks and use the due diligence process to ensure an outcome that meets owner objectives.
This list below includes typical buyer due diligence documents that you should expect to review when considering a multi-family property purchase.
- A completed and signed Seller’s Property Disclosure.
- Copies of all leases and rental applications, to include:
– Most recent financial statements and credit information and reports, if any, on any tenant and of any guarantors of any leases or rents.
– Any executed letters of intent with prospective tenants, including lease concessions.
– Leasing status report from the leasing broker, including pending rental applications.
– Include copies of leases for all subsidized tenants and documents relating to any inspections by government agencies.
- Historical rent delinquency reports.
- Operating statements (income and expenses) for the previous two years of ownership and current year-to-date operating statements.
- Certified rent roll showing unit numbers, tenant names, rent rates, security deposit amounts, current rent payment status and lease expiration dates.
- A schedule of all capital improvements made to the property for the past 2-4 years.
- Security deposit detail (tenants and pets).
- All service contracts, manufacturer and service warranties and other written contracts or agreements. A property may have contracted services for: Laundry, pest control, trash hauling, landscaping, snow removal, elevator servicing, cleaning services, window washing, security services, parking lot sweeping, etc. If possible obtain copies of current service contracts and review the following:
– Term of contract.
– Monthly cost for services.
– Work to be performed.
– Termination penalty.
- As-built surveys showing any improvements to the property.
- Copies of liens or liabilities on the property that should be known to the buyer prior to closing.
- Copies of all insurance policies.
- Copies of all insurance claims in the past 5 years.
- Lead based paint disclosure.
- Inventory of all property owned by the seller and a complete list of all inventory to be transferred with the property.
- Physical inspection of the property (this is not a document — it’s just a reminder that you should always request a physical inspection as part of your due diligence).
Below are additional due diligence documents that may be included in your document requests:
- Names and contact information for all employees including salary information.
- Copies of all warranties.
- Copies of last two years’ tax bills — including evidence of payment.
- Copies of all architectural renderings and blueprints.
- Environmental audits and reports.
- Soils test reports.
- Engineering studies including reports on walls, roofs, foundation, supports and floors.
- Any structural, mechanical, electrical, plumbing, seismographic, HVAC or other property systems replacement, maintenance and/or repairs (including invoices and estimates).
- Copy of current mortgage, and letter from current lender(s) showing the current balances and terms of the mortgages.
- Copies of all local utility invoices showing current service.
- Current operating and capital budgets of the property, including comparison of actual to budgeted results and an explanation of significant variances.
- Current aged receivables and payables reports.
- Reports showing compliance with ADA requirements (Americans with Disabilities Act).
- Building square footage certification.
- Recent photographs of the property.
- Copies of rental unit floor plans.
- All property licenses and permits.
- Certification of fire inspections and any other city sanctioned property inspections.
- Certificates of occupancy for each tenant.
Questions about buying or selling a multi-family property? Contact us.