Evaluate A Multifamily Property In 4 Easy Steps
By JD Esajian on April 25, 2017
Closing a profitable real estate transaction typically starts well before you take ownership of the property. If you aren’t sharp with your evaluation on the way in you will be playing catch up throughout the process. It is not enough to base your buying decisions on instinct or a gut feeling. You need to dive into everything about the property, the numbers, the demographics and even the seller. The more units the property has the more evaluation that needs to be done. While increased units does give you some margin for error you still need to know exactly what you are getting with the property. With decreased demand in many markets there is increased pressure to act quickly. By knowing what to look for you can be confident that you will make the right offer and be comfortable enough to know when to walk away. Here are four important steps to help evaluate a multifamily purchase.
- Discover Seller Motivation. Regardless if you are looking at a small mobile home or a large commercial building your property evaluation should start with evaluating seller motivation. By understanding motivation, it helps you determine when you need to act the type of competition you should expect and what purchase price range you need to be in. Sometimes something as simple as a quick conversation can tell you everything you want to know. Other times you need to dig into the circumstances to get your answers. Either way you need to spend some time with the seller or their representatives before getting too far. You never want to spend weeks on a deal only to find out that the sellers were never really interested in selling unless they got a number that was unrealistic. Not only can asking some basic questions up front save you time but can also help you get the best possible deal. The more you know about the seller and why they are interested in selling now can help with the rest of the transaction.
- Property Upside. Before you dig into the nuts and bolts of the numbers you need to look at the potential upside with the property. It doesn’t take a genius to know that you always want to buy on the way up before a property peaks. Trying to time the market at the exact right time can be tricky so it is more important to look for signs of growth. Is it possible to increase the rent without breaking the bank? Is the market currently in a downswing but showing signs it may be primed to take off? Potential is always difficult to evaluate but any property you buy must have great potential. One of the ways to look for upside is by breaking down the current market data. In addition to looking at real estate data you should start by focusing on demographics. Are major employers leaving the area or is there is steady trickle of new companies coming in? Are the foreclosure numbers steady and is there low crime data? These market indicators will help determine if the area is ready to explode and if you should make an offer.
- Break Down Market Numbers. Once you get past market demographics you need to get into the numbers. There are two basic sets of numbers as it relates to property evaluation. The first are the macro numbers that deal with the market and then the micro numbers that deal with property specifics. Understanding both play a critical role when deciding to move forward with an offer. Macro numbers in the market include recent sales, current transactions and average days on the market. Look at recent transactions that are as close in proximity to the property as possible. A similar multifamily sale ten miles from your property should have little impact on how you view the deal. A property that is closer, even if it is not the exact size or room count, is a better comparable than one a few towns over. You should also look at how quickly multifamily properties in the area are selling. If these properties are selling at the same pace as other properties you know the area is in high demand and should hold its value.
- Micro Property Numbers. The final part of your evaluation should deal with the specific property. For many investors, this thought process seems backwards. The reality is that it is always better to look for a more stable market than a more stable property. With the property, you need to take a realistic look at comparable rents and see how your property stacks up. You also need to know every expense that is included with the property. Hidden expenses will directly impact the monthly cash flow and turn an attractive property into an average one. Some properties have fees and expenses specific only to that town. Here is where your networking will allow you to reach out to a real estate agent or fellow investor in the area and ask questions. The answers you get you go a long way in shaping your decision. It is important that you are confident and comfortable with all the numbers with the property prior to submitting an offer. Once you take ownership it is too late to turn back the clock and go back on the deal.
Breaking down a multifamily property is very much the same process as any other type of property you look at with a subtle twist. Follow these four tips before getting involved in your next multifamily deal.