Multi-Family Due Diligence Checklist
If you’re planning on leaping into multifamily investments in a competitive market like Boston, you’ll need to create a process for performing due diligence on a property. You can protect yourself from a long list of potential pitfalls by knowing how to fully assess a multifamily home for sale in Boston. By creating a checklist to perform due diligence, you can evaluate both the physical and financial aspects of the property in question.
Many of the items on the multifamily due diligence checklist are required by the lender once the property is under contract. Some are not required by the lender but are important for evaluating the property for potential profitability and/or losses. Be sure to include these items in your due diligence checklist:
1. Local Market Analysis
This should be one of the first items you check before you start making offers on multifamily properties in any location. Understanding the economic aspects of a particular housing market can help you assess not only the current property values but also potential appreciation over time.
You should research population growth, unemployment rates, household income growth, average rent prices, home prices, and crime rates. Analyze these data from a historical perspective to see if a housing market is progressing or regressing. Look up who the largest employers are and look for any news of new companies expanding into the area. This can help you spot under and over-valued multifamily properties in any market.
2. Property Condition Assessment
The property condition assessment (PCA) is performed by a third-party agent once a commercial or multifamily property goes under contract. Most lenders require this before financing a multifamily investment. The agent is looking to examine the condition of a property and estimate both current and future maintenance costs. In some cases, the PCA will be used by the lender to determine if and how much the buyer has to hold for replacement reserves, which are funds set aside to cover future repairs.
3. Property Walk-Through
Ideally, an investor will do this before making an offer, but for out-of-state investors this may not always be feasible. For those out-of-state, it’s still a good idea to do this yourself once a property is under contract. When conducting a visual inspection of the property, you want to be sure to check the following details:
- Roof age/condition
- Exterior building materials/windows
- Exterior landscaping
- Interior condition – check the age of appliances, cabinetry, and fixtures. Look for any ceiling stains that would indicate leaks.
It’s especially useful if you become familiar with a local market’s zoning laws and housing codes. This can help you spot potential improvements during your walkthrough that could add more value and improve your cap rate.
4. Environmental Site Assessment
Many lenders also require an environmental site assessment or ESA be done on a commercial or multifamily investment property. During the ESA, a third party will audit a property to determine if any environmental contaminants are present. They are looking for traces of hazardous chemicals, petroleum products, pesticides, mold, asbestos, and lead paint among other things. If any traces of these substances are found on the property, the lender will typically order a Phase II ESA, which consists of gathering samples from the affected areas for further testing.
Every lender will require an appraisal before offering a loan on a multifamily property. This is when a third party agent will determine the value of the property under contract. The appraiser will assess the structural condition of the property, the building envelope, HVAC and electrical systems, and the interior finish details. They will compare the property to similar multifamily properties in the areas to come up with a value estimation of the asset, which is a critical component to the sale of the property.
6. Financial Audit
In addition to evaluating the physical aspects of a multifamily home, most lenders will also want a financial audit of the property to determine its viability as an investment. As a buyer, you should analyze the last 12-24 months of P&L statements that exist for a multifamily property. Look for any discrepancies that could lead to added expenses to your NOI, such as if the seller has been performing maintenance or managing the property himself. These costs will fall on you if you can’t do them yourself, and need to be taken into account when projecting your net operating income for a property.
7. Rent Roll & Lease Audit
Similar to the financial audit, the rent roll and lease audit is an in depth analysis of the current revenue being generated by the property from tenants. The rent roll is a list of all tenants, their lease period, and the rent amounts due from each tenant. A lease audit is a deep dive into the current leases active on the property. You’ll want to know if any landlord concessions were made, lease terms, rental increases, extension options, and short-term rental clauses if they exist.
8. Survey/Title Report
A title report and property survey will always be required by a lender to determine the legal status of the property deed. What they are looking for is if any other party may hold a legal claim to the property being sold. In some cases there may be a tax lien or a third party with a legal claim on the property that could affect the ability of the property deed to be transferred to the buyer. They will also look to see if there are any easements or restrictions on the property.
As you can see, there are many considerations to take into account when purchasing a multi family investment property. By creating a due diligence checklist, you can develop a system for researching and finding viable multifamily properties with potential for both short-term and long-term profitability. You can also protect yourself from a multitude of ways an investment could go wrong.
We’ve helped hundreds of Boston-area landlords in streamlining their due diligence process. We provide valuation research in the form of comparative market analysis, and can even help real estate investors reap the tax benefits of a 1031 exchange. We provide the most real-time housing data so you can set rents that will maximize ROI. And of course, we offer second-to-none marketing to ensure your investment properties are occupied with reliable tenants. Contact us today to talk to a Boston multifamily expert to see how we can help you!