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As multifamily rents continue rising to meet demand, there has never been a more lucrative time to invest in multifamily properties. According to the Yardi Matrix Winter 2019 Report, $4.5 billion in apartments have been traded in 2019 in my area of Greater Houston alone. However, before a property can be acquired, due diligence must be done in order to avoid costly headaches, drawn-out processes and inconvenienced residents. Here are a few key steps to take when attempting to acquire a multifamily property.
1. Create a pro forma.
Once a prospective property has been identified, the investor will need to create a pro forma, a financial information sheet detailing the property’s existing profit and loss statements as well as a current rent roll, or a snapshot or current revenue of the property, including lease charges, as well as the investor’s own projections of same. Proven multifamily property management companies can provide insight on projections of operating expenses and revenue, as well as market reports. Additionally, the pro forma needs an estimate by the buyer of the needed costs for potential capital improvements.
The pro forma will be key in analyzing all returns that should be expected through annual return on investments and cash-on-cash returns. Multifamily pro forma templates are available online for less than $100.
2. Establish a relationship with a multifamily lender or broker.
Financing multifamily properties can be complicated. Apartment communities with more units will have more stringent requirements than those with fewer units. Any property with more than four units will need a commercial loan from a commercial multifamily lender.
Generally, a commercial lender will look for the investor’s net worth to be higher than the loan. In addition, lenders like to see a previous track record of successful investment and management in multifamily properties. Once a relationship with a lender has been established and a sale price has been created from the pro forma, a letter of intent needs to be drafted and sent to the broker or seller.
3. Start the due diligence process.
Pro formas are a great tool to discern if the investment makes financial sense. However, pro formas do not show the ins and outs of the physical property itself. That’s where the role of due diligence comes into play. During the due diligence process, the seller must provide access to the property for the buyer so that they may inspect the interiors of all the units and all the mechanical and structural aspects of the entire property.
The due diligence process is vital for the buyer to minimize the risk of surprise costs or maintenance needed once the deal goes through. During this time, the buyer should also perform a lease file audit to ensure that the financials of the pro forma are correct and obtain pricing on any capital expense items that the buyer wishes to pursue.
4. Finalize the deal.
If no surprises are found during the due diligence process and the buyer wishes to proceed with the sale, the title company will check the property title for encumbrances, order the appraisals and wait to close. The lender will send the loan to an underwriting company, and once everything comes out of underwriting, a final rent roll is sent to the title company. The seller then transfers all security deposits to the buyer, and once funded, the buyer takes over the property.
As rents continue to rise along with demand for multifamily housing, good investment opportunities in the industry will be more commonplace. Multifamily property investments can be rewarding if the necessary and correct steps are taken to ensure a smooth transition of ownership. Lenders and property management companies are there to provide help and assistance to make investment goals reality.