Failing to conduct an adequate due diligence check on your property is a risky mistake. A property you are interested in could look amazing on the surface level, and you may think that it will be a successful investment; however, it could end up being a money pit upon a closer look. By skimping on due diligence checks, you place your entire rental property portfolio in jeopardy.
As a bare minimum SnapInspect suggests including these four steps into your due diligence multifamily checklist.
Due Diligence Financial AuditTypically, a multi-family due diligence financial audit will be carried out by a third party independent contractor. This part of a due diligence inspection is crucial- it checks-outs many of the assumptions you may have about the property. An in-depth financial audit needs to review at a minimum of three years of financial trails (e.g., bank statements, maintenance orders).
In addition to reviewing financial trails, your audit should also include at least one year of monthly revenue insights (Profit and loss income statement). This should consist of the revenue and loss of the building month by month for the last year at minimum. Lastly, you should also review the previous two years of tax returns and, the previous year of utility bills.
Multi-family due diligence financial audits are commonly carried out by financial service consultants who use the information to determine the assets performance history. Consultants will present you with an in-depth view of the building’s past and projected income and expenses. This allows you to have a great understanding of your potential future property. Financial multi-family due diligence audits also mean that you don’t have to put all your faith into the numbers that your property agents give to you. Give yourself the ability to evaluate the income potential of the asset by getting a comprehensive financial audit before closing any property deals.
Multi-family Due Diligence Condition InspectionResidential property buyers will usually get a home inspection by a profesional before purchasing the asset. It’s the same for Multi-family properties. SnapInspect recommends conducting a property condition inspection to provide a profesional view of any improvements that are required.
The bottom line typically comes in the form of a PCI report (Property condition inspection) and should include a cost summary section that gives you estimations for all predicted repair work.
Perhaps the most attractive part of conducting a property condition inspection is that you can use the findings to negotiate a lower sale price. Additionally, some buyers may decide to walk away from the opportunity altogether if the PCI points out a surprising amount of repairs.
Analyze Your CompetitionYou must reflect on your rental competition to see how your property compares to other close proximity buildings. Compare quality, condition, rent prices, offers, amenities, customer service, and anything else you have in common with the competition. After comparing each point, make sure to analyze how much of an effect that will have on your ability to manage a property and overall be profitable.
Review the Current MarketIf you plan on having a profitable building, you need to understand the market. You probably by now have a basic understanding of the specific structures rent potential and possibly a few surrounding buildings- But how well do you know the whole market? What is your target demographic? What is the status of the local economy? Will each unit be competitive in the market? What are the key selling points?
Surveying the market is crucial as it helps you to verify assumptions and understand the local market. If you have enlisted the help of a real estate agent, they should be able to provide you with all this information efficiently. The more you understand, the better off you will be.
Conduct Walk Through Inspections On Each UnitInvestors will range from inspecting a small portion of units to walking the entire building. SnapInspect suggests the latter. Before you close the multi-family deal, you need to walk-through and inspect every unit.
It’s common to hear excuses as to why you can’t walk through every single unit- “I work late” or “I’m on holiday” etc. Do not settle for that. If you are not walking each unit, your multi-family due diligence report will be worthless. Don’t risk not knowing all the facts because you don’t want to bother tenants. Be relentless, do not take no for an answer, and insist you walk through each unit.