Sep 24, 2020
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Multifamily Due Diligence: Eight Things Most Investors Miss

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Real estate investor developer and property manager. President and CEO of TM1 Properties. GETTY Due diligence in acquiring a multifamily asset is typically more art than science. Ask any multifamily broker and they’re going to inform you the multitude of strategies in regards to the processes of due diligence that different investors use

 

At a minimum due diligence should include a financial review lease audit certificate of occupancy status check contract review and property review to name a few. As a general contractor-turned-multifamily investor I locate that most people miss eight things when evaluating the present construction of a multifamily asset. If you’re an experienced investor your typical property review process will include an evaluation of the roofs and foundations cameraing of the sewer lines to find problems a walk of the units to determine make-ready costs and a listing of deferred maintenance

 

Listed below are other things that you need to consider: 1. Aluminum wiring: From the mid-1960s in the course of the 70s simply by high copper prices aluminum wiring was installed on new construction of multifamily buildings and home homes. Typically Fannie or Freddie will make you update these with the intention to get a loan

 

Sometimes they won t even inform you until you have already got the loan and get your first inspection and then have to make the upgrades. My former construction company upgraded a 150-unit complex from aluminum wiring to copper and that was a pricey fix for the owner. 2. Outlets: Before 1969 many residential units didn t have grounding within the electrical outlets

 

That’s easy to see because in place of a three-pronged outlet like you are used to seeing the outlets will only be two-pronged. This would usually have got to be updated to code. PROMOTED Grads of Life BRANDVOICE | Paid Program
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Federal Pacific or FPE Stab-Lok breaker panels: These were installed from the 1950s to the 1980s and are potentially dangerous because if they fail they could cause fires. When you have these panels you will likely have to switch them by lender requirements. You need to replace them anyway to protect your asset

 

4. HVAC inventory: I’ve got done much due diligence on multifamily complexes and I’ve got yet to see any seller have a correct inventory of their HVAC systems. You need to look into each of these. It is best to have an HVAC contractor walk the valuables with you to get an assessment

 

That’s the largest repair expense you will have and you would like an excellent estimate of the number you will be replacing within the first year. You would like to know freon types manufacturers tonnage and the condition of the units. Typically they’re split systems but not always. Also where are your condensers? Are they on the roof? You would possibly desire to build in the price of buying a lift

 

Otherwise you will be renting one each time you ought to change out a condenser doubling your cost. 5. Cast iron sewer lines: In the event that your asset was built previous to 1975 you likely have cast iron pipes for sewer lines. Those are only a nightmare waiting to happen

 

They corrode through the years and you will not escape the wrath of them breaking. It s not a matter of if they’re going to break; it s when. When cameraing the lines your plumber can t really tell what style of material the pipes are made of unless they see rust — and then it s obvious

 

They’re looking for possible areas which will cause clogs such as tree roots bellies (low areas) within the pipes etc. 6. Water cut-offs on the property: If you’re walking around you would like to search for water cut-off points already installed at each building. These are essential when making repairs in order that you do not have to shut the water off to the total property to make an easy repair to 1 unit

 

If there are none plan to have some installed. 7. A drive-by at night: A part of your due diligence needs to be driving by the valuables at night. This would assist you get a feeling of how safe your private home really is. You can also see how well or poorly lit the valuables is

 

Among the best things you could do to protect the valuables and your tenants is to light where up at night. Thieves don t like well-lit areas. 8. Balconies or upstairs porches: Any asset built more than 15 years ago was built with a structural code that was suspect. Typically balconies or upstairs porches were cantilevered out with two-by-fours or two-by-sixes which aren’t strong enough for the burden they carry

 

The typical solution is to put four-by-four posts underneath to support them. In case you don t you run the chance of somebody getting hurt. From my a long time of expertise these are the things that I’ve got learned to look for. Early on I didn t and that they came back to haunt me

 

The point of due diligence is to uncover all of the issues of the property. It isn t to convince yourself how great of a deal it is. Hire contractors and engineers and don t skimp. You are making money in real estate when you buy so just be sure you buy right

 

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