Be Wary of These 5 Mistakes in Your Multifamily Deal Analysis

Multifamily property deals make potential investments, provided your multifamily deal analysis safeguards you from estimation and judgment errors. Estimating the profitability of a multifamily property investment deal is easier said than done; it requires practice and experience, qualities seldom held by those new to multifamily investing. When you are handling intricate multifamily deals that involve substantial capital investment, it is prudent to weigh the nature of each component.

To this effect, it is always prudent for investors to avoid the following mistakes at all costs when conducting a multifamily deal analysis.

5 Tips On How To Analyze A Multifamily Property

Estimating repairs, expenses, and unit turn costs

Multifamily asset ownership costs you from day one, starting with capital expenses for structural improvements, repairs, and unit turn costs. At times, without significant upgrades and repairs, the property does not yield a good rental value, even if records show some alignment with market standards. In such cases, you have to bring the value of each unit up enough to attract tenants who you would want to profile.

Firstly, you must estimate whether the property will yield in line with current rental market expectations; without those renovations, it might be difficult to find renters who are willing to pay a rent you can agree on. In a slow market, renters expect quality units and amenities worth their dollar; in an active market, when they are spoilt for choices, they demand the best amenities! So, financing repairs to essential elements such as functions, drainage, roofs, sidewalks, parking, etc., may be required.

Incorrect parallels between unit rent amounts and market rate

How to analyze a multifamily property without reading the market wrong? Simple, never assume the market. Some are quick to raise rental fees without first checking whether the rates are currently in line with market value expectations. Instead, suppose you are taking over tenants from the previous owner. In that case, it may be more helpful to offer concessions, such as discounted months or free amenities and utilities, to retain tenants, especially if the rent is in line with market rates.

On the other hand, you may also, possibly, encounter a situation where you inherit tenants who are quite reluctant about paying their dues on time. Buyers who are too eager to max out their occupancy rate are usually the ones who face such challenges. So, analyze the unit rent amounts and the current market rate, and determine a fair rental price that strikes a middle ground between you and your tenants.

Check Out The ULTIMATE Real Estate Deal Analyzing Course

How to analyze a multifamily property for critical expenditure

Analyzing historical financials is essential to evaluating the operating expenses you will need to incur. This includes property taxes and insurance rates, which may alter once ownership passes to you. It is also wise to consult commercial property insurance carriers and to be aware of the possibility of new rates.

Alternatively, you can speak to the local treasury to get a more accurate update on the possibility of a property tax increment. It is also a good way to confirm whether the seller’s numbers are valid. You may also determine whether there is a risk of tax liens on the property. It is also recommended to factor in utility costs, so you may want to speak directly with the utility providers. By rule of thumb, each unit’s rent should be approximately 35-40% of the expense ratio.

Excluding the seller’s motivation from your multifamily deal analysis

How to analyze a multifamily property for what it is truly worth? Well, for starters, the seller’s motivation for offloading any given asset is as important as your reason to invest. It is always prudent to dig deep into their reasons for selling the property. Questions and euphemisms about their reasoning behind selling can divulge critical information about the property’s condition.

This information can help you negotiate better prices and terms with the seller. Some investors are diligent enough to work the cost of the repairs and renovations into the seller’s price to ensure a rebate. Motivations such as a multifamily inheritance property can cause the seller to settle for a lesser price as realistically. The buyer would not share their investments; the seller is simply motivated at the prospect of the payout from selling the property.

Overlooking the present residents and leases

Lastly, one must always pay close attention to the present tenant leases and their particulars before sealing in a multifamily deal. Each new vacancy may require two expensive unit turns, all the more if no maintenance has been carried out on them. Take note that the cost of unit turns can shoot up entirely out of the blue. Proper multifamily deal analysis requires you to take stock of the residents and the community.

There are many moving parts to focus on, so it is relatively easy to lose control over your holdings if you are unlucky enough to inherit a building full of belligerent tenants. The tricky part of dealing with such situations is salvaging your rights through updated terms and conditions; tenants may just invoke en masse lease cancellations and departures, leaving you to deal with multiple vacancies. Set proper tenant qualification guidelines for prospective tenants.

Way forward

The gist of the matter is that a multifamily deal always warrants scrutiny of the fine print and the income and expense data as submitted by the realtor and the owner. It is always advisable to seek consultation from a mentor or an investor with extensive experience in multifamily real estate investing. Preferably someone who is an unbiased observer to the deal and is not involved on any side of the transaction to prevent a conflict of interest. You are good as long as your multifamily asset deal is on a path that avoids any of the above-cited mistakes.

Sound deal analysis protects capital before it seeks returns.
Learn how experienced investors evaluate multifamily opportunities inside the MIH Multifamily Mastermind. Explore the MIH Multifamily Mastermind framework.