The Top 5 Things To Know Before Buying Multifamily Properties

This article is about the top 5 things you need to know before buying multifamily properties. But relax, it’s not hard, most of it’s common sense, and if you’ve already invested in single family homes, it’s going to be familiar. Just remember, multifamily properties are a bit more complex, the numbers and scale is higher and that makes the risk greater. So be careful!

Investing in multifamily properties can be a lucrative and rewarding endeavor, but it also comes
with its own unique set of challenges and considerations. In this blog post, we will explore the
five most important things you must know before taking the plunge into multifamily real estate
investment.

What is a Commercial Multifamily Property?

A commercial multifamily property is a residential property that contains 5 or more separate
units, such as apartment building. Unlike residential real estate, which is typically purchased as a primary residence or for investment purposes, commercial multifamily properties are bought for investment or development purposes.

The Top 5 Things to Know Before Buying Multifamily:

1 – Location, Location, Location:

○ Yeah, I know. This one is easy and it’s a cliche. But that doesn’t make it any less true. The location of a multifamily property is paramount to its success. Look for properties in areas with strong job growth, high rental demand, and a favorable economic outlook.

○ When evaluating a property’s location, consider factors such as proximity to major employment centers, transportation hubs, schools, shopping, and entertainment venues.

○ Also, research the area’s crime rates, demographics, and any potential development projects that could impact the property’s value.

○ Don’t be fooled by great numbers on a property in a crappy location. You’ll never achieve great revenue and low expenses on properties in poor locations. Tenants don’t really want to live there and they won’t take good care of your properties, so expenses will be higher.

2 – Property Condition and Maintenance:

○ Conduct a thorough inspection of the property’s physical condition, including the
building’s structure, roofing, plumbing, electrical systems, and common areas.

○ Assess the quality of the property’s construction and materials, as well as its
overall maintenance history.

○ Look for signs of deferred maintenance or major repairs that may need to be
addressed in the future. This is a big one for older properties, so make sure you get a qualified inspector, and if necessary bring out other specialists to inspect systems like Roofing, Septic Tank, HVAC, Foundation / Structural, Windows, etc. Older properties can be in great locations, but if they haven’t been maintained over the years, the repair bills can kill cash flow for many years.

○ Consider the property’s age and whether it has undergone any recent
renovations or upgrades. If it’s had significant renovations or repairs, make sure you check with the building inspector to ensure that all work was ‘permitted’ and documented. Just because it looks ‘shiny and new’, make sure you do your inspections! It could just be ‘lipstick on a pig’ and you’ll have significant costs later to do things correctly.

3 – Rental Income Potential and Operating Expenses:

○ Analyze the property’s historical rental income and operating expenses to
determine its profitability.

○ Consider factors such as average rent per unit, occupancy rates, and vacancy
periods.

○ Evaluate the property’s potential for rent growth based on market trends and the
condition of the local economy.

○ Estimate the property’s operating expenses, including property taxes, insurance, utilities, repairs, and maintenance.\

○ Generally your lender will evaluate the deal based on historical financials, or if you’ve got an established relationship with a lender and have experience with distressed properties, they will use your business plan.

○ My advice is to be skeptical and really look at how the property has performed over the past couple of years. Almost every proforma / T-12 I’ve evaluated from a broker will tend to overstate revenue, and understate expenses. If you read their footnotes, they will admit to adjusting expenses down based on, submarket averages, or non-typical expenses that were paid, or just because they felt the current owner overpaid for something. They’re not being dishonest, just trying to make the property look as good as possible. But if Commercial Multifamily values are determined based on the financials, you want to make sure you’re underwriting based on actuals, not hypotheticals or projections.

4 – Financing Options and Debt Structure:

○ Explore different financing options, such as traditional bank loans,
government-backed loans, and private lenders.

○ Understand the terms of the loan, including the interest rate, loan amount, and
repayment schedule.

○ Consider the impact of the loan on your cash flow and long-term investment
goals.

○ Work with a financial advisor to determine the optimal financing structure for your
multifamily investment. Utilizing a loan broker can be a good option and can be critical on larger deals, but remember they have to get paid, so make sure you understand their charges.

○ Depending on the market, for smaller deals ($750K – $3M) I’ve found local credit unions to be a good source of financing. Once you’ve established yourself in an area / market and have done a few deals, a local credit union can be a quick way to get financing. They also have a little more flexibility to adjust terms based on your credit worthiness and the location of the property. They like to support their local community.

5 – Legal and Regulatory Considerations:

○ Be aware of the local zoning laws, building codes, and rent control regulations
that may impact the property.

○ Consult with an attorney to ensure compliance with all legal and regulatory
requirements.

○ Understand the landlord/tenant laws in the area and the rights and
responsibilities of both parties.

○ Consider the potential impact of any pending or future legislation on the
property’s value and operations.

○ This is an area where it just pays to make sure you have the right expertise evaluating your deals. Missing something in the legal or zoning area can ruin an investment, so get a qualified expert and use them!

Conclusion:

Investing in multifamily properties can offer investors a steady stream of income, appreciation
potential, and long-term wealth creation. However, it is crucial to approach this investment with
knowledge and caution. By understanding the top 5 things you need to know before buying multifamily properties outlined in this blog post, you can increase your chances of success in the multifamily real estate market. Remember, multifamily investing involves complex financial analysis, legal considerations, and property management responsibilities. It is advisable to consult with real estate professionals, financial advisors, and legal experts to make informed decisions and mitigate potential risks.