Diversifying your real estate portfolio is a smart way lower risk against changing markets.  Multifamily and homes flow along each other but also away from each other depending on what the real estate cycle is. 

Just as investing in homes an investor should consider location, demographics and financing in making their decision.  Part of your due diligence is  solid inspection.  As important as inspections are in homes, they are even more important when purchasing a multifamily property. 

The fact is that multifamily properties for the most part are not as well taken care of as houses.  Here is a list of items to pay particular attention to.

The location. 

The location is important for different reasons then a house.  A multifamily building is more like a business and your analysis should take into account if this property will attract tenants.  What are the amenities, like shopping, schools and so on.  Communication is very important so make sure there is good access to freeways and public transportation.  Also pay attention to activity in the area, visit in the evening as see how it is.  Survey your competition.  How will your potential purchase compete against other apartments vying for the same tenant.

Acoustics and Noise. 

A common concern for tenants is noise in neighborhoods as well as from other tenants.  Be aware of the types of walls the flooring of the apartments.  You don’t want to be hassled by tenants who constantly complain about jumpy neighbors upstairs, or music next door.  If you plan on remodeling you can add acoustic dampening but factor that cost in. 

Leases. 

Study the leases carefully.  You don’t want to be stuck with a 4 year lease with no provisions for an increase.  Sometimes lease may be false, so the tenant may thing he/she is paying one rate while you were told another, most likely higher rate.  A good way to protect yourself is to insist on an estoppel agreement.  These are signed by the tenants and spell our any obligations to the owner, even promised obligations should be noted.

Plumbing. 

In many older units there are old galvanized pipes.  If these have not been causing problems  then they will.  Be careful as somethings copper pipes are seen on the outside but behind the walls they still may be galvanized.  Check to see if there are any invasive trees around the property or the neighbors.  Some of these trees take over water and sewer pipes.

Electrical. 

Older properties tend to have old wiring.  Some of the electrical boxes have been recalled as well but they are still on these properties.  Tenants these days have microwaves or electric water kettles which require a lot of power.  Some lines are not meant for these, and may be a hazard.

Exterior Appearance.

How do the buildings look on the outside?  Look at the details, will you need to paint or refinish the fascia? Are there cracks in the walls.  What about landscaping.  Some buildings have no landscaping and others have unkept or outdated landscaping which will scare away better prospects.

Parking. 

Seems like everyone has a car and often this causes parking problems if there is a lack of spaces for all tenants.  Be aware of how many spaces are available for each unit and if it is enough.

Interior appearance. 

A good indicator of bad, is sloppy work done by people who don’t know what they are doing; crooked grout lines, bad patching jobs will need to be fixed at some point. Prospective tenants do notice these things.

Mold. 

Though not as big a factor as in other parts of the country, we do have mold in Greater Phoenix and its more common in apartments where tenants don’t often tell landlords about leaky pipes under the sink or owners are simply not aware because they don’t inspect the property enough.  Look carefully where ever there is water for leaks, even a slow small drip  over time can be mold forming.

Security

Security is a big factor for tenants.  You don’t want to advertise that you provide a secure dwelling because it opens you up to responsibility, you do want to check the overall security of the property during your due diligence.

Laundry facilities.

Many properties have laundry facilities either in each unit or a shared laundry either owner owned or with leased equipment from a third party.  When purchasing a property make sure you know who owns what and if its a third party get a copy of the contract.  I have seen obnoxiously long 5-10 year lease with absolutely no out for the owner and little in therms of compensation.  These laundry facilities are more often for tenant convenience then profit but you want as much your cost to be covered as possible.

Roof.

Oh yeah the roof.  Be very wary of flat roofs.  On older properties these flat roofs are more like ponds holding tons of water after a rain, relying only on the sun to dry them off.  While there may not be any leaks, these roofs with water wear out quicker, shortening the life of a very expensive thing to repair.

These are just a few of the issues that need more attention but check everything and most of all, hire an inspector.  If you don’t buy a property because of an inspection you’ll think of the money you lost for the inspection but imagine if you didn't do an inspection and purchase a property which drained your pocketbook and profit.  Its well worth the cost.

In a future article we will jump into the next part of your due diligence, namely the income and expenses and financing.