Due Diligence for Multifamily
By Bill Ham, Author of Real Estate Raw: A step-by-step instruction manual to building a real estate portfolio from start to finish
- 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
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.