1. DO NOT–Buy the cheapest priced property (among the competition).
Often times the cheapest asking prices are for a very good reason: terrible condition, poor unit layouts, cut up/converted units (versus built-that-way traditional units), electrical heat (versus gas furnaces or boilers), bad financial condition (tenants don’t pay on time, etc).
2. DO NOT–Buy without a full inspection with photos and detailed section by section report WITH work cost estimates.
Don’t let a friend, relative, or inspector talk you into a reduced inspection report with just photos. Contact a reputable company that provides reports with cost estimates for necessary work. There are plenty of good inspectors who do this, but Edick Valuation Services is a good one. Our clients have used them. Structure Tech is another reputable company, but from our first hand bidding experience, they tend to be higher in cost for the same scope. These rates vary by unit count and total square footage. On the same four plex in Fridley, Edick quoted $450 while Structure Tech quoted $875. If asked, inspectors will do a walk through with verbal report for half the cost–our advice–GET THE FULL REPORT!! Also consider add on inspections like floor drain/main sewer line scopes by contractors like All Ways Drains which typically run about $200.
3. DO NOT–Buy your property based upon “comps.”
Multifamily properties physically vary greatly from building to building–bedroom counts, square footage, capital improvements, etc. If your agent cannot produce a spreadsheet for a property detailing the likely cash on cash returns with all the property market income and expense assumptions with capital needs estimated–PULL THE PLUG. If you’ve signed an exclusive representation contract, ask for a cancellation. Comps help provide a range of value, but NEVER, NEVER should be the determining factor on an offer price or value. Fully underwrite the property to determine an offer value (including any immediate capital needs). You will thank us!
4. DO NOT–Forget to value your time.
We often talk to owners of property who are sellers at well above market numbers. When educated that someone would have to manage and lease the property for free at that price, the reply often is–“well, that is how I looked at it when I bought it.” Bad news–it no longer is 2006. Think about it–your time needs to be valued if you are actively managing your property–just as you would at your job or with your family. Typically InvestProp factors in a place holder of 5% for small properties in A/B locations and 10% for small properties in C locations. Don’t forget that if you assume you are running the show and you have to move for work or physically can no longer help, your cash flow just decreased by 7-10% of Effective Gross Income (the going rate for small properties). Take it from us–factor that property management fee in there–pay yourself!
5. DO NOT–Assume the tenants are paying rent.
If you or your agent ask, Sellers will provide Rent Rolls detailing the existing tenants, move in dates, rents, security deposits, etc. However, that piece of paper is just that, a snapshot of what tenants agreed to do–whether or not they are actually paying rent on time is another issue. For every purchase, even a small duplex, ask for: 1) an updated Tenant Ledger for each tenant showing a debit and credit for all charges including security deposit off sets, 2) a YTD P&L , and 3) a Schedule E (or equivalent) for the previous calendar year tax reported income. Remember to do all of this DURING due diligence so you can negotiate for discounts for any non-reported negative info. A good agent will request a list of documents in the original Purchase Agreement painting the full picture of the property.
Questions? Contact InvestProp. We are happy to help!
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-Brad Schaeppi, founder and CEO.