How to do Due Diligence on Apartment Building

[Matt Liu]

I am buying my first apartment building this winter. Any tips on how to do due diligence? I've seen every unit now with a contractor. We went over the exterior and mechanicals too. Should I hire anyone special for the boiler or roof or other given that it is a building not a house? Radon, bedbugs, anything like that?

[Arthur Barrington]

Hard to say where to start! lets go with the big money ticket items like roof inspections to include gutter systems that run into sewers as well as any drainage issues.

The next thing I would say would be foundational issues,drainage as well as flood plains issues. Here is one do you have a phase 1,2 or 3 study that might show waste site activity nearby or industrial pollution? Maybe the topsoil is contaminated with lead based paint or oil from a nearby gas station.

Another expensive issue might be an inspection of all plumbing systems to include main drains leading to the city drains and you would be best off to get a good report from a plumber that is local and knows the property. The boiler systems and water heaters should be dated and have a condition report. The lines that run through those building are they in good shape or full of collars and do the boilers look rusty or seem inadequate when running hot water in a pipe in the farthest away part of the apt building from boiler room. Does the city have lines that back up into the mains on the apt building?

I like to know all about utilities like gas electric. How old are gas lines and is electric wiring the old aluminum or is it copper and ect?

Next I would be interested in the windows and doors and insulation value and who pays these bills and thats a bigger deal then you might think.

Condition of hvac, inspect? Consider things like services paid like, the company, or the manager if its self managed, pest control and dumpster fees, annual elevator inspections can easily be changed with good management. You wont eliminate these services just maybe reduce them a little.

The empty units you should have a per door number on the rehab for each unit. Also a bank will want reserves in place if you plan to renovate or numbers for a construction loan.

These deals exist and especially in Ohio or parts of Midwest. I know I have done them. I once paid 1.3 million for 74 units with 97% occupancy. The deal appraised at 3.2 million at close and I put 10% down to close this loan. The apartments I bought were 10 years old at time I purchased. The fat cash flow I have enjoyed for 12 years.

Usually older buildings sell this cheap so if your buying stuff older then 20 years beware of the deferred maintenance its a killer.

I want to see 2 years of books to include bank deposits anything less speaks of non sense. I want 2 years rent rolls/ expenses. Cam reports and to see leases and all that paperwork. Each unit should have a file and inch thick if the apt building is over 10 years old. I ask for blueprints and I like to see engineering data if it exists at the court house. Obviously you dont need all this on a 4 unit building but over 16 units probably yes as much as possible to be informed. Even seeing an office and shop thats organized properly can say a lot about a property. I once looked at a 280 unit property and the key box was a mess I just knew right out of the gate it was going to be a list of problems.

Under 75% occupancy the banks wont do conventional loans so it would be a construction loan with 20% down. Unless your net worth has collateral to justify, or other means like a blanket loan on other assets or an loc on a larger business u own. Good luck and due diligence is key. Having a plumber,electrician, hvac guy and a good handyman will be a start. I have a crew so I can just pluck a few guys off that have specialized knowledge and bring them with. I have one guy, head of maintenance he knows everything I need to know about hvac and plumbing and electrical he goes on my inspections.

I ask people that give me a tour hey how often are your maintenance guys snaking these main drains and how many times weekly are they having to snake drains that arent mains. This can give an indication of the condition of the drains and do they have to constantly push a grease log back and forth across a properties main sewers on a regular basis. I might ask how many work orders are your crew members or maintenance guys doing per day? Can I see a report showing all the service calls performed and work orders performed last month. Not having this info make me have to create my own info based on experience and knowing the age of mechanical's on the property as well as age of buildings.