For multifamily property investors, the question of how much to grow an existing portfolio can be a difficult one to answer. On one hand, creating new streams of revenue is always an enticing proposition. But on the other hand, those new opportunities also come with more risk.
Some of this risk can be mitigated thanks to greater economies of scale when it comes to purchasing insurance and preventive services (think water leak detectors and smart HVAC systems). Scaling up a portfolio also means building a team that collectively has a wider range of skills and more bandwidth to take care of properties and fix problems quickly. However, there’s no getting around the fact that having more properties means more ways things can go wrong — and more factors that need to be considered.
But with the real estate market currently booming, many investors might be tempted to overlook the risks. They’re worried that if they act too slowly, they could be missing out on a once-in-a-lifetime opportunity. This is precisely the time, however, that investors and owners need to be extra diligent, taking every risk into careful consideration before grabbing up a new property. Otherwise, they might find that their long-term investments are harmed by short-term thinking.
So what risks should multifamily property owners and investors be on the lookout for when trying to expand on their investments? Here are the biggest issues that have the potential to slip by unnoticed and create expensive headaches down the road (and how to avoid them):
1. Damage to the foundation and roof.
A good inspection should cover everything in a property, from the bottom to the top — literally. Both the roof and foundation can hide damages that when left unchecked, will cost owners thousands of dollars. On average, foundation repairs can cost as much as $8,500, with that number rising substantially for larger structures or extensive damage. Meanwhile, replacing a roof can mean an average price tag of $8,000.
Foundation damage in particular can be especially vexing, causing recurrent structural faults, cracked walls, and stuck windows. A damaged foundation can continue to worsen at a steady rate as soil shifts beneath it, making it important to catch these issues early. One telltale sign of foundation damage is cracks in the exterior. The size and frequency of the cracks can often be a good indication of how bad the damage is and how long it has been left untended. When it comes to roofing, pay attention to any loose or broken tiles, as well as the conditions of the gutters. Watch out for leaks, too, especially when it comes to buildings with flat roofs.
2. Problems within individual units.
It’s important to inspect every unit when deciding whether to buy a property. After all, each apartment is a separate home, potentially containing all the problems that an individual house can have. In addition to ensuring that each unit appears to be in good condition, you should also check for less obvious issues, such as mold or water leaks.
Even something as seemingly innocuous as a dripping faucet can waste as much as 34 gallons of water annually, not to mention that unchecked leaks can damage walls and floorboards and lead to more costly repairs in units (and the building as a whole) down the road. Take note of every issue you find within each unit and calculate how much it will cost to get everything in shape before you make the decision to invest.
3. Mechanical systems on their last legs.
Electrical, plumbing, heating, and cooling — if any one of these systems fails, you’re going to be stuck with unhappy tenants and a large repair bill. Make sure you get professionals in to inspect each of these systems before making a purchase. You’ll have a much better idea of whether or not you’re investing in a property with systems that will be around for the long haul or ones that will require frequent (not to mention costly and time-intensive) maintenance.
4. Risks to the environment.
What sort of risks does a property pose to the health of tenants and the environment around it? Does it still have lead paint on the walls or asbestos in the insulation? Is there mold that could be hazardous to people’s health? What about the property’s past life? Was a gas station or dry cleaner once on the land? Are there any residual environmental risks as a result?
Not only are these questions important to safeguard the health of residents, but the answers will also tell you whether or not you should expect any hefty fines from regulators down the line.
5. Bad finances and unpaid debt.
The property itself is not the only area of risk for investors. Make sure you take a look at the accounts and tax returns of the current owners to check for any discrepancies in reporting that could hint at larger issues. You should also look into the rates of existing leases and check on how many tenants are staying current with their rent payments.
6. Pricey utility bills and service contracts.
Who’s paying for heat and electricity within the property? If it’s the landlord, keep in mind that though you can charge higher rent to make up the difference, tenants might take advantage of this and worry less about their individual usage, driving up your own costs.
The same question should be asked when it comes to services such as trash, laundry, and snow removal. If renters don’t foot the bill for individual services, take a closer look at each service contract and make sure you’re getting a price you can live with.
There’s no question that right now is a good time to invest in more multifamily properties. However, that doesn’t mean you should just start buying properties left and right without performing your due diligence. Missing something big — such as foundation issues or unpaid taxes — can quickly make what looked like a good investment on paper an anchor around your neck. Take your time and hire professionals to help with inspections. A little investment in time right now can save you a lot of money down the road.
Source: Multifamily Insiders