You’ve just closed a multifamily deal and are ready to renovate. Unfortunately, many challenges have popped up. The seller overstated the occupancy rate and your rehab estimation was too low. As a result, you are stressed out and scrambling.
Hopefully, you’ve never had to deal with any of scenarios above, but there are many potential renovation hazards and it’s all too easy to learn the hard way. Here are some common rehab issues and how you can avoid them.
Not enough transparency
When you are looking for a new multifamily property that’s a diamond in the rough, you may not see to see everything. There is no set standard for access, and the amount of access you’ll likely receive is dependent on the owner and how competitive the transaction is. Some owners will offer limited inspection areas, while others won’t let you open a wall.
Generally speaking, if you’re given the chance to look, it’s probably not as bad as you think and you will be able to get some sort of idea of the repair cost. If they won’t give you any access, you’ve got to estimate for the worst-case scenario.
Over-inflated occupancy rates
Naturally, sellers want to show you healthy occupancy numbers. Sometimes, however, those numbers are deceiving. An occupancy rate can be padded with concessions, a lack of credit standards and short-term leases.
Keep that in mind when you are in the lease-audit part of your due diligence. Unlike the access to the building, you should receive full transparency here. Short-term leases indicate the occupancy is likely to drop. When your community is near a college, for example, and the leases are now expiring because the peak time has ended, it will have a negative impact on your long-term occupancy rate.
Low rehab estimate
Getting a renovation budget just right is nearly impossible, but you can increase your odds by standardizing products. Even if you have different property classes in your portfolio, many renovation components will be the same. You may have to tweak as needed – such as by accounting for higher-end plumbing fixtures in a Class A property versus a Class C property – but at least you’ll have a better idea of what you are going to need to budget for.
Consider the potential pitfalls above before you finalize your new acquisition. By having the clearest picture of the renovation reality that you can have, you’ll stand a better chance of a successful project outcome.