Friday, October 20, 2017

7 Pitfalls to Avoid When Buying a Multi Unit Home

Buying a multifamily investment property can be a complex process. In order to maximize the return on your investment, when considering making a purchase, it is important to understand some of the basic pitfalls that can come back to bite you in the long run.

1. Not all income properties of the same size and even location are equal. For example take two properties located on the same street each with 6 units. Property A has 6 one bedroom , one bathroom units and Property B, has 6 2 bedroom 2 bathroom units. Which property is more desirable? When evaluating properties it is essential to analyze and understand the local rental market. When evaluating properties it is essential to take the mix of rental units into consideration as all things are not equal.

2. Square footage, are they accurate and are the rental units the right size? I have always held the mantra “trust but verify” In most listings the selling agent and vendor will provide square footages. However in the actual listing the listing agent will almost always have a disclaimer depicting that these are just estimates and they nor the vendor can be held liable for any errors. In situations where price per square foot is relevant in making an investment decision – pull out the tape measure and measure the unit yourself.

When evaluating a residential property it is also important to look at the size of the units themselves. Are the units desirable and efficiently laid out? A poorly laid out unit, or one that seems either over sized or undersized will have a higher turn over rate.

3. Beware of quoted vacancy rates. Most agents and experts will quote the vacancy rate when talking about the desirability of investing in a property. Vancay and tenant turnover rates are across the board averages, Properties on the same street can differ from one another as much as different neighborhoods can within a specific geographic area. Talk to local agents and residents, and do your due diligence. Spend some time researching classified rental ads on sites like Craig list.

4. Chattels and Fixtures included. When purchasing a multi family property you are not just purchasing the land and property you are also purchasing the fixtures as well. If you are looking at purchasing a 10 unit property, makes sure that in the agreement of purchase sale, the refrigerators, stoves, dishwashers, are all listed, and included in the agreement, and that such agreement stipulates that all appliances are in working order. To have to go out and replace appliances can become a costly proposition. Logically speaking if one or more of the units do not have appliances the price should be discounted accordingly.

5. Zoning. Your right to use, live in, build on, renovate, add on to, conduct business,
and lease out , will all be set out in the zoning. Know your rights and limitations before offering to purchase a property. Applying for zoning variances can be done but it can be a timely and expensive proposition. Be aware of any and all potential issues from the outset. Height and restriction and setbacks will not only govern new construction but will also limit renovations conversions and building additions.

Owning a property that is not compliant to the current zoning could potentially open up all sorts of cans of worms, from insurance and mortgage issues to issues with the city or local fire departments. The bottom line is to do your research and make sure that you are asking all the right questions.

6. Rental Income. The most important aspect when evaluating an Income producing property is to ensure that the rents and income provided by the vendor are accurate and in line with current market realities. DO YOUR HOMEWORK. Ask to review the lease agreements to ensure that ensure that the units are in fact rented. Cross reference these numbers with the income statements provided. Then go research the local rental market. Are the rents being charged over, below or at the market value? Answering this question will give you greater in your ultimate decision to move forward or to sit this one out.

7. Environmental. This issue is becoming more and more of a hot topic as of late. Most people assume that environmental issues surround commercial properties, but they can also affect residential and multi residential purchasers. Once you purchase a property you as the owner may be liable partially or entirely liable should an environmental issue come up at any time. If you are purchasing an older property in an older area, there is a good chance that there could be a buried oil tank or asbestos around some old pipes. You will be responsible for all of the clean up. In older properties it can be wise to have an ‘environmental phase one report’ included as a condition in your agreement of purchase and sale.

Buying and investing in real estate and investment properties can be financially rewarding, the key whether you are a first time investor or seasoned pro is to make sure that you have an experienced team working you to make sure that you are not missing anything that could cost you in the long run. – RF

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