Multi-family investments can be very rewarding. You have the benefits of scale – both in terms of cash flow, value and economies and efficiencies – and impact larger numbers of people with the improvements you make to your properties and its operations. After going through the hard work to learn about multi-family investing, there is much pride in crossing that finish line and securing your first property.
However, in multi-family, the stakes are higher. As I shared in The Difference Between Investing in Multi-Family vs. Single-Family Real Estate, as buyers of multi-family property, we are buying businesses and competing with other buyers of businesses. As such, it is very important to know what to look for, ask, and find out prior to closing, where the property, as well as its liabilities, are then yours until it is sold.
Due Diligence
Due diligence is used to describe verifying and evaluating all that there is to know about the property prior to closing. This includes rent collections, other income, all expenses, the condition of the property, environmental risks and more. As you can imagine, thorough due diligence is even more essential for multi-family assets than single-family residential real estate because there are more unknowns. What do I mean?
Seller Disclosures
Of course, because we are seeking to acquire larger properties than single-family, there are more units, livable square footage, residents and risks altogether. However, there is another reason risk is greater in acquiring multi-family real estate, and that is that seller disclosures are not required in the same way they are for residential real estate.
When you buy a single-family home, the seller is required to share as much as he or she knows about the property. This is done to protect unsuspecting retail buyers and owner occupants. Most buyers of single-family real estate intend to live in the property as owner occupants and not operate it as a business or investment. However, when it comes to multi-family real estate, those same seller disclosures are not required.
As a buyer of a business, your team is expected to know and understand what you are doing and, therefore, go through the proper due diligence. The seller does not have to disclose that there are electrical issues or that taxes will be reassessed upon sell. In fact, as an example, taxes are one of the largest operating expenses of multi-family real estate. Some states, such as Florida, are point-of-sale states. In these type of states, the sale of the property, taxes will be reassessed and you want to know (before the closing) what they are likely to be. What you may find out is material to whether the deal works. Property taxes can make or break some multi-family investment deals and these are the things you will not find out from your broker or the seller. Finding out too late can be harmful, as your recent positive cash flow asset can negatively cash flow.
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