Due Diligence Action for Prospective Multi-Family Investors
Investing in a multifamily property can be a wise business decision, but failure to take the proper due diligence action can potentially result in financial disaster. By taking these due diligence steps, however, you will be more likely to be happy with your investment and the results that it yields.
Know the Market
When considering a multi-family property investment, you need to consider more than just the rent potential for that property. Rather, you need to do due diligence about the market as a whole. This includes gaining an understanding of your target demographic while also researching the stability of the local economy. Conducting a market survey will help you learn more about the local market so you can make an informed decision about making a purchase.
Investigate Future Expenses
As you consider a property, you need to think about the future expenses that may be associated with purchasing it. In addition to taxes and insurance costs, you should also consider preventative maintenance and ongoing maintenance costs. When considering a multi-family investment, keep in mind that certain costs will be increased by the number of units within the property. Rather than replacing one dishwasher, for example, you may have three that will ultimately need to be replaced in each of three units. Make a list of all of the potential maintenance costs and compare it to your potential income in order to better determine if it is a sound investment property. Other ongoing expenses to consider include management fees, legal expenses, marketing, and utilities.
Inspect Every Unit
When viewing a multi-family property, it is essential to inspect each of the units in order to see their layout and condition. Never assume that all of the units are the same or that they all need the same improvements. Doing a walk-through of all of the units will help you determine the additional costs you will have to invest in the property before you can rent it out to new tenants.
Pay for a Financial Audit
While it will add to your total expenditures, paying for a financial audit is money well-spent. With a third-party conducting a financial audit, you can find out more about the property’s operating history. By looking at an overview of the property’s operating income and expenses over the past few years, you will have a clearer picture of how the property is likely to perform for you after you have purchased it. If you don’t like what you see, move on to the next potential investment.
Explore Environmental Factors
A number of environmental factors could potentially cause problems for you and your investment property. Therefore, you should be sure to conduct a thorough inspection that examines factors such as lead paint, asbestos, underground oil tanks, infrastructure issues, wetlands and other conditions that may have an impact on your property or lead to additional costs.
While there is no fool-proof method that will guarantee an investment is a good one to make, due diligence will help you weed out the properties that do not make the best investments. In doing so, you will increase your chances of finding the right multi-family investment property for your portfolio.