Investing in multifamily real estate has produced excellent returns for investors who perform due diligence before investing. There are several steps to achieve this. Before making any investment decisions, it is crucial to conduct thorough due diligence to ensure that you are making a wise investment. We'll define what due diligence is regarding multifamily investments and offer a checklist to keep you on track.
What is Due Diligence in Real Estate?
Due diligence in real estate is investigating a property before purchasing. Investors need to review several factors that include analyzing the project's strengths and weaknesses, market trends of the project's location, financial documents that contain the last three years' financial statements, trailing twelve-month income statements, and current rent roll.
Your Multifamily Acquisition Due Diligence Checklist
With a complex investment such as multifamily real estate, buyers must keep track of all aspects of a potential purchase. Our due diligence checklist shows what you want to assess and review.
1. Property Inspection
Hiring a firm specializing in inspections for multifamily apartments is essential, and they can provide you with a comprehensive inspection report. Several companies perform limited capital needs assessment evaluations that can identify immediate needs and future repairs the project will need to complete. The inspection usually includes looking at the building's structural components, the remaining useful life, and their efficiency. If there are many repairs and major structural components that need to be replaced, it is a great opportunity to offer less than the asking price to consider the money needed to replace the component.
2. Analyze Market Trends
It is crucial to look at the market trends in the location and surrounding areas of the project. Several companies provide market reports to review the vacancy rates, current rents charged by unit type, historical and projected rent charts, and additional apartment supply expected in the next few years. If the project you are purchasing has low occupancy rates, there could be several reasons why. These range from high tenant turnover, a weak management company, and competitive apartments in the area that offer more amenities for the same rent.
3. Review of Property's Financial Documents
Due diligence of your investment requires a review of the property's financial documents, including:
- Expense Statements
- Rent Rolls
- Operating Expenses
We suggest requesting the last three years of tax returns, a trailing 12-month income statement, and the previous 12 months of rent rolls. This information allows you to analyze the project's Net Operating Income (NOI). By looking at the income and expenses, you can see if the rents are in line with the market as well as the expenses. This is an excellent time to check if the rents are below market and if there is an opportunity to make capital improvements to increase the rental rates. Additionally, analyze operating expenses during this phase and see where costs can be reduced to increase profitability.
4. Review Management
Review the property's current management and experience in managing like-size properties. Review the property's legal and regulatory compliance to ensure it is current with city, state, and federal regulations. This includes verifying the property is up to code with building requirements, proper certifications, and permits. Many investors like to bring in their management to run their projects. This allows them more control and oversight over their investment.
Schedule a Consultation for Your Multifamily Real Estate Investing Project
Taking the time to complete due diligence on your investment upfront will enable you to make informed decisions that reduce risk and increase your chance of success within the multifamily real estate industry. At LSG Lending Advisors, we’re the experts in multifamily financing and can assist you in evaluating the various financing solutions. Contact us today to discuss your project!