How To: Avoid Hassles by Being Prepared
It’s all too easy to fall in love with a property, but just like the beautiful homes in movies that turn out to be haunted, that “great” deal you are getting on a multifamily property you’ve fallen for may come with some expensive ghosts. To avoid the trap of getting a bad deal based on how you feel about the property on its surface, here are a few considerations to mull before you sign.
– Have you underestimated repairs, unit turn costs and capital expenses?
You may love the older facade on a multifamily property, but to everyone else, it’s just outdated and needs to be renovated before you can get full market rent. There may be unit turn costs, repairs you’re overlooking, or units that need work before they can compete in the current market.
In short, you’ve got to be brutally realistic about what a multifamily property will need once you invest. It’s not about how you see the property; it’s all about how your prospective tenants will view it. Make your checklists and be objective!
– Is raising rent realistic?
It’s easy to visualize how much a property will command per unit once you’ve taken advantage of the opportunities you’ve identified to raise rent. However, you have to check whether the current rates are already market before you can even consider raising it. Maybe the seller included concessions or other things you’d have to deal with for a time after you’ve taken on the property. If the multifamily property is in a competitive market, you may not be able to raise rents without driving away tenants since they have comparable options in the same area. Assuming you can raise rents as soon as you take over the property is counting your chickens before they’ve hatched, and you could be left with a goose egg if you’re including those increases in your income estimates.
– Do you know the seller’s motivation?
Find out why the seller is selling this property that seems perfect on the surface. You may need to ask more than one time, but it’s crucial to undercover the true reason. Are there hidden problems you haven’t found yet, or does the seller simply want out? Uncovering the former could prevent you from making a costly mistake, and the latter – the highly motivated seller – means there may be ways to save via seller concessions.
– Have you Looked at the current leases and tenants?
Review all current leases and their expiration dates. You could be facing expensive unit turns for every new vacancy, particularly when a multifamily property has significant deferred maintenance. The community itself could have serious problems, such as a property management team that has lost its control.
While it’s certainly possible that investing in the property you fell in love with is the right move, it could also turn out to be a mistake you’ll truly regret. Gut feeling is never going to replace due diligence, so always remember to dig deeper before you invest.