As an investor, you know that it’s impossible to do too much homework on a property – but it’s definitely possible (and risky) to do too little. This guide covers 15 things you should look for when you’re buying a multifamily property in Silicon Valley, and you can use it as a checklist to ensure you’re not missing a thing.
15 Things to Look for When You’re Buying a Multifamily Property in Silicon Valley
You’ve heard it before and you’ll hear it again: due diligence. Due diligence is the act of taking reasonable steps to establish a property’s assets and liabilities, as well as to evaluate its commercial potential. With that in mind, here are 15 things you need to check when you’re interested in buying a specific multifamily property:
- The 12-month property operating statement
- The current rent roll
- Property tax data
- Existing leases
- Provisions for tenants
- Inspection reports for each unit
- A market analysis for the area
- Competitor analysis
- Legal issues
- Necessary renovations or repairs
- Evaluate the seller’s reasoning and motivation
- Tenant reviews
- Community growth
- Proximity to major amenities
Here’s a closer look at each.
#1. The 12-Month Property Operating Statement
One of the best predictors for how well a property will perform in the future is its history. A 12-month operating statement, or T-12, can give you a look at seasonal trends (such as whether most tenants choose to move out during summer or many pay rent late around the holidays) as well as the property’s track record for generating a profit.
#2. The Current Rent Roll
The schedule of rents – commonly called a rent roll – shows how much each tenant owes against the total amount received. You can typically see how long each tenant’s lease is by looking at the rent roll, as well.
#3. Property Tax Data
Check past tax statements to see how much the annual tax bill may go up in the future – taxes tend to follow trends.
#4. Existing Leases
Review existing leases on the property to ensure that none of them will leave you poorly protected, and make sure that the rent is fair market value. You should also find out when the rent was last increased.
#5. Provisions for Tenants
Find out what provisions the current owner has made for tenants, such as providing laundry appliances, water bill payment, or internet services.
#6. Inspection Reports for Each Unit
Physically inspect each unit, common areas and the exterior of the building (or hire someone to inspect these areas for you). That way, you can find out whether you’ll likely need to make repairs soon after buying the property.
#7. A Market Analysis for the Area
Determine whether the area’s population is growing, declining or hovering at a steady rate. Additionally, look into crime statistics and the unemployment rate.
#8. Competitor Analysis
See what other investors are charging in the area, what they’re offering with rental units, and how good their customer service is. If you buy the property, they’ll be your competitors, so it pays to find out whether you can outshine them in the future.
#9. Legal Issues
Check for pending litigation related to the current owner or the building. If there is pending litigation, you’ll need to find out who will be responsible for judgments and whether the litigation will impact your ability to buy the property.
Check to see if residents are paying rent on time, and if some aren’t, find out exactly how many. You should also see if any past-due accounts have gone into collections.
#11. Necessary Renovations or Repairs
Find out if there are any renovations or repairs that you’d need to make immediately upon taking possession of the property, or if any improvements have been made recently. See if the current owner can provide you with receipts and warranty information for recently completed work on the building.
#12. Evaluate the Seller’s Reasoning and Motivation
Talk to your REALTOR to find out why the seller is offloading the property. Is it a money pit? Are the taxes too high? Is tenant retention a problem? You may experience the same problems the current owner has if you buy the property.
#13. Tenant Reviews
Talk to tenants, if you can. Find out what their concerns are about the property, what they enjoy about living there, and whether they plan to stay.
#14. Community Growth
Determine whether the community has potential for growth. For example, if you know a new shopping mall or hospital is under construction right around the corner (or planned for the future), that may be a good sign that property values will increase and that the community is on-track to grow significantly.
#15. Proximity to Major Amenities
Evaluate how close the property is to major amenities, such as schools, grocery stores, parks and other attractions.
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