For investors moving from single family homes or something like duplexes, graduating to apartment buildings brings with it a whole new complexity along with the potentially greater profits. Due diligence is extremely important. You should start the fact-gathering process with their first encounter with the property and continues until you either bail out of the deal or close it.
Here’s a list of sources of information (people, places & things) that are good starting points if you’re trying to research a property.
Sales & Ownership Data
Even if the property is represented by a real estate agent and you have a title search going through a reputable title company, a lot of valuable information can be found checking some government records. Fortunately, many records now are available on line, so this can be a quick search.
Tax assessor information is likely to be the most accurate and current source of information. Between the assessor and the county court you should be able to find many real estate documents that are recorded, such as deeds, liens, restrictive covenants, easements and subdivision plans. These are usually kept at the courthouse for the county in which the property is located (Recorder of Deeds or Tax Assessment Dept.) if they are not online.
If you want to find out who owns the property but don’t know the address, one way to be able to identify the property is to go to the municipal building and look at the tax maps or tax plats of properties in the municipality. By process of elimination, you should be able to identify the property (thus giving you the owner name, address, parcel number). It’s a good idea to take a copy of the tax map with you when you return to the property since this will help you to pinpoint its location by counting parcels on the map from intersecting streets or other landmarks, particularly if the property is vacant land. Again, be aware that some of the information in the database or on the tax maps may not be accurate, particularly the size & shape of parcel, zoning classification, and whether the property’s serviced by public utilities.
Check with your local municipality for renter restrictions. Are there rent control provisions you need to be aware of? Are there other restrictions that could cause your repair budget to go off the deep end? For instance, in one case, a friend of mine doing some remodeling of the bathrooms in his apartment building found out from the city that when he did that he was required to update all of the water lines throughout the structure. This cost him over $12,000 he hadn’t budgeted. If part of your plans call for remodeling, check out all the terms you will face for permits.
You should review all leases with current leases. Pay attention to details because when you buy the property you inherit all of the provisions. If you plan on having the tenants leave after four months to do renovations, only to find the tenants have iron-clad leases good for another nine months, your plans will (expensively) go out the window. Also it is a good idea to talk to all of the renters that you can. Verify that what they pay in rent matches the terms on paper. Some shady sellers will make side deals with renters, letting them stay free or at sharply reduced rents to make the apartments seem fully occupied and more valuable.
Check the claims for vacancies and revenues against bank deposit slips for at least two years, preferably three. Also verify the amount of renter’s deposits on account that should transfer to you on closing match what the contracts and tenants say should be there. Make sure there are move-in checklists for all units.
Even if the apartments are newly remodeled, you will have to budget for expenses so keep a close look at all claimed expenses for three years. Sometimes sellers will claim the previous year’s expense rates are high but will be lower “because everything’s fixed now.” Or else, you could find that previous year’s expenses were even higher, and the seller has been cutting back on expenses to make the numbers look better.
Have a thorough inspection done of all parts of the apartment by a knowledgeable contractor or an inspector familiar with apartment units. In particular, check out how all major areas are functioning but also their current ages and get an estimate of their useful life. For instance, the roof may be okay now, but if it will likely need replacement in less than five years you need to account for that in your budget. All major systems including heating, cooling, power, water, gas, paint, flooring, parking lot and all other areas should be thoroughly checked.
By doing a careful due diligence, you can avoid costly surprises that can turn your highly profitable investment into a loser. It is not hard, only a matter of carefully reviewing all of the details to make sure there is nothing there you can’t live with, and you walk into your deal with eyes wide open.