What to watch out for Multi-Family Deals

[William Dorough]

Hi all,

I never purchased the multi-family investment and I want to get into this type of an investment.

I red numerous post regarding the multi-family, but I was wondering if I can get help on what to watch for in multi-family deals in following categories while searching or during the process of offering, or buying; financial standpoint (difference from SFR), structural standpoint (what to inspect), landlord standpoint, and repair standpoint.

Also if there is anything else I should watch out for while looking for or proceed to buy a multi-family property that does not fit above categories, please advise me.

Thank you so much for your time.

William Dorough

[Roy N.]

@William Dorough

Hmmm ... where to begin .... 

When you use the term multi-family above, are you referring to a conjoined wall residential property (2-4 units) or a true multifamily property (5+ units), as seen by HUD, Fanny/Freddy, CMHC and the majority of conventional lenders?

Residential properties are appraised and priced using comparable sales the same as a single-family residence (SFR). Conversely, multi-family properties are appraised using a couple of different approaches, but predominately are valued on the {net} income they produce - very much like any other business.

In the buyers shoes, you are looking for economies of scale with a multi-family property: one roof, one envelope, less vacancy risk, lower cost per unit, etc.   In both cases, residential or multi-family, you make your money at the time of purchase - rarely can you achieve operational improvements that will offset a poor purchase.

When buying either a residential or multifamily, you need to formulate your exit strategy(ies) before purchase. With a residential property, particularly a SFR or duplex, you have the option of selling to a retail buyer (i.e. homeowner). With a multi-family, your buyer will be another investor.

The financing and purchase (close) will differ between residential and multi-family (commercial). Financing a residential property is very much like placing a mortgage on your personal residence - with a few small differences ... namely high-ration mortgages are not available on non-owner occupied properties. Just like your personal residence, the mortgage qualification will be based on your economic strength (income, DTI, assets, etc.). Building inspections and closing costs will also be like those on a personal residence.

Financing of a multi-family property will involve commercial lending.  The good news is the qualification for financing will be based largely upon the financial strength of the property/business itself.  The lender will be interested in your experience managing properties - or that of your hired management - and will examine your own financial strength to demonstrate you have some acumen and are not a fiscal basket case.   Closing costs will be greater as you typically pay for the lenders legal, administrative, and closing costs.  Building inspections can also be more expensive as most residential building inspectors are neither interested, nor qualified, to examine larger buildings and you may find yourself engaging engineering firms.  You may also be requires to undertake an environmental assessment of the property by the lender (to prove there are no old USTs or other surprises waiting to ruin your, or rather, the lender's day).

Where you can often successfully purchase a residential property without using a buyers agent, an experienced commercial broker will be an invaluable player on your team during the purchase of your first few multifamily properties.

Enough rambling ... and I did not even get through the purchase processes ... must take the boy to daycare.