Due Diligence for Multifamily
“How do I do due diligence for multifamily?” I have been asked that a lot lately. The answer is simple. Break the process down into three categories. Physical, financial, and lease audit. These are the three main components of doing due diligence when investing in apartments.
- Physical Inspection
- Walk every unit! Yes, every unit. Have someone qualified to inspect each unit inside and outside.
- Take and assessment of condition of the property including the actual vacancy (because you counted when you walked all the units).
- Calculate any upcoming capital expense costs (roofs, parking lot, PLUMBING).
- Lease Audit
- This can be done during your physical inspection. You will want to verify the leases the seller has on file match the rent roll provided to you.
- Check for at least these items-
- Tenant ID matches rent roll, lease, and lease application.
- All documents are signed.
- Check tenant screening records (or lack of)
- Financial Inspection
- This is the process of verifying the income and expenses, that the seller has given you (T12), are real.
- Do this by reconciling the income and expenses (T12) against 12 bank statements matching the months on the T12 for the property or for the LLC that owns the property.
- Use a tax return instead of bank statements.
This is a brief description of the process for conducting due diligence on a multifamily apartment complex. Please seek the advice of professional council to conduct the process explained here.
About the Author
I am a multifamily owner/operator and Chief Operating Officer at Broadwell Property Group. Through my companies, I seek to purchase and manage a currently growing portfolio of commercial multifamily real estate.
In 2005 I quit my job as a corporate pilot and went into real estate full-time. I had closed only one deal. A duplex. It was cash flowing about $300 a month. I started my entire real estate carrier with this one duplex and a life savings of $10,000. Not much.
My first 402 units were completed with some form of creative financing such as seller financing and master lease options. Over the years I built a large portfolio of real estate consisting mostly of apartments. I built a management company that operated the portfolio. At the peak that company was comprised of 16 employees and managed over 1000 units.
Over the years I had many successes and many failures. Some small and some big. I have made a lot of money and I have lost a lot of money. I have seen all phases of the market. The up cycles and the down. The good times and the bad. I have survived them all. Knowledge and skills are only passed on by those who survive.
The information I offer you on this site is my own. It has been tried and tested over a long career in the real estate business. Everything here has functionality that you can use, not untested theories. I have been successful with everything I teach. You can be too.