“How do I do due diligence for multifamily?” I have been asked that a lot lately. The answer is simple. Break the process down into three categories. Physical, financial, and lease audit. These are the three main components of doing due diligence when investing in apartments.
- Physical Inspection
- Walk every unit! Yes, every unit. Have someone qualified to inspect each unit inside and outside.
- Take and assessment of condition of the property including the actual vacancy (because you counted when you walked all the units).
- Calculate any upcoming capital expense costs (roofs, parking lot, PLUMBING).
- Lease Audit
- This can be done during your physical inspection. You will want to verify the leases the seller has on file match the rent roll provided to you.
- Check for at least these items-
- Tenant ID matches rent roll, lease, and lease application.
- All documents are signed.
- Check tenant screening records (or lack of)
- Financial Inspection
- This is the process of verifying the income and expenses, that the seller has given you (T12), are real.
- Do this by reconciling the income and expenses (T12) against 12 bank statements matching the months on the T12 for the property or for the LLC that owns the property.
- Use a tax return instead of bank statements.
This is a brief description of the process for conducting due diligence on a multifamily apartment complex. Please seek the advice of professional council to conduct the process explained here.
