We are in the process of concluding a multifamily listing that kept us very busy these last few weeks. During the listing period, we came across several investors who seemed new to this area and had a lot to learn before pulling the trigger on something. Therefore, today we are going to discuss some points that are always worth considering when evaluating a multifamily property.
What is the Structure Like?
Does the property have a concrete or wood frame? Is the exterior full brick or have siding? How old is it? With a multifamily property, you are not just buying a cashflow—you are acquiring an asset. How solid is that asset? Make sure the structure is sound.
How is the mechanical in the building?
Are there forced air furnaces in each unit? Is it a boiler system with hot water or is it electric baseboard heating every unit? Heating is a very important consideration. In Ontario, hydro rates are sky-high; having electric heat is a huge drawback and can sap the cash flow of any building. Gas is a more economical choice.
Are utilities separately metered?
Are there separate meters for gas and hydro? Having your tenants pay for their utilities adds lots more certainty on expense projections. Statistically when tenants pay their own utilities, they are natural incentives to not waste energy.
How do the existing rents compare to CMHC average rents?
If you review the rent roll and the rents seem low, this can be both good and bad. It's good that there is upside in the average rents in future should you have tenant turnover; it's bad in the fact that if you have very low rents, the tenants will be much less apt to leave such a good deal. You’ll only be able raise their rent by the annual CPI percentage (1.8% this year).
What is the tenant profile?
What is the area like? What sort of tenants would you attract in this building? What sort of jobs do these tenants have? It is important to understand what sort of rental pool you are operating in. If you want to attract high-end renters, you need to look at high-end locations.
What is the cap rate?
Is the cap rate consistent with the market? Does it seem too high or too low? If it's too high, it might indicate there is something off with the building or problems with the tenants. If it's too low then it probably won't appraise at the bank, meaning you’ll be forced to put down a higher downpayment, lowering your returns.
Do the expenses seem legitimate?
We continuously see buildings being advertised with several items being excluded from the expenses. For example, they’ll only include utilities, insurance & property taxes. What about other items? Where are the repairs and maintenance, management, grass cutting, snow removal, and vacancy allowance? Sometimes these buildings are run and managed by the owner, but if you are a hands-off investor, you need to hire someone for these tasks—they need to be accounted for. An appraiser working for the bank is going to rework these expenses too and run the number based on their expense assumptions.
Do you notice any major deficiencies related to fire code?
This one isn’t easy to identify and it's a bit of a grey area at times, but there are some easy items to look for. Are there any basement units? Did they get permits for the basement unit? Are there egress windows in the basement units? Are there multiple entrances and exits to the building for tenants to access? Do items like fire alarms and smoke detectors seem somewhat recent?
Those are just some items to consider when evaluating a multifamily building. There are quite a few more, but we wanted to keep this at a beginner level. Readers, are there any more you think should be added?
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