Evaluating Multifamily Homes as Investments

Buying a multi family home, is a great way to go when considering a rental investment, it can bring in a large amount of money, from a centralized location, and upkeep is easier if you have 4-20 units in the same area, as oppose to all over the city or county.

A multi family home can be anything from a duplex house, where you can live on one side, and rent out the other, to help pay for the investment, to a big 20 unit apartment complex, or larger. Depending on the size, you may not have the working capital to take care of all of the units, and depending on rent by itself is a sure way to lose your investment entirely. So please consider the following and incorporate it into your business plan before buying any investment property.

What is unique regarding multiple dwelling homes, is that there is usually renters already in them. Be very wary of this, as you do not know these people, and an enthusiastic seller will be glad to tell you that there tenants all pay their rent on time, and they are the best tenants you would want etc. Then only after purchasing the home do you find that they haven’t paid in months, and have a criminal record a mile long.

To protect yourself, before even buying the home ask to see the returned checks and signed receipts of the tenants. All landlords keep records such as this, if they do not have them ask to see a notarized statement stating that all tenants are up to date on rent, and notation on who is not. If the property owner does not have anything such as this, or does not make an effort to acquire them, run , don’t walk away, and forget about the idea of sinking your money into the investment. Many times that great deal from the kindly old gentleman of a four unit dwelling, of which he priced at an absurdly low number, is because, he has a bunch of tenants not paying rent, and the property owner would rather shore up his losses and get out from under the problem., then go through the hassle of eviction, repair and re-renting the unit.

Next before buying, ask to inspect all of the units, occupied, or non occupied, again this is a reasonable request, and if there is any hassle on this don’t bother buying it. Make a notation on each unit, and if possible hire a contractor and appraiser to go over the units with you, the cost of expert advice is well worth it. The Contractor will be able to tell you how much it would cost to fix any problems the investment may have wrong, and the Appraiser will tell you the current net worth of the house. Many times the person selling already has the appraisal value, if the appraisal is more then a year old get a new one done.

If the owner pays the utilities, ask to see the monthly operating cost, by looking over the utility bills for the previous twelve months, add that into the calculation of what is being charged for rent. Also consider the age of any heating and air conditioning units, and the hot water heater or heaters. Check the inside of the cover on them to see their age, and the last time preventative maintenance was done. Remember that if hot the water heater or furnace goes out with a multi family home, it will affect all your dwellings, and cost more to fix.

When calculating if this is a good investment, take into consideration; How much rent is currently being charged per unit, how much it would cost for any needed repairs, the yearly cost of house insurance, property taxes, yearly utility cost, and any tenants behind on rent, as well as the age of the home and age of its hot water tanks and HVAC units. If the money you have to invest into it, will not pay itself back within 8-10 years, look elsewhere for a better investment.

Tips For Success.

1. Have all current tenants sign a new lease, as soon as possible, make them go through the same application process as a new tenant would.

2. If you fix up the dwelling, know that you do have the right to raise the rent, a reasonable level.

3. Consider charging a $25.00 late charge for all days the rent is past due.

4. If you agree to a payment schedule for past due rent, have it added as an amendment to the contract, having the tenant paying for it to be notarized, most banks have a notary, and charge between $10-$20.

5. Since the tenants will be living so close to each other, add rules for conduct into your contract, this will help ensure harmony between tenants, and help you to evict trouble makers.

6. Know every adult that will be living at the unit, and have them sign the contract as an occupant whether they will be the ones paying the rent or not.

7. Read your insurance policy carefully, some are now refusing to pay, if the tenant does not carry renter insurance.

8. Make it a part of the contract to be able to go into the unit for inspection, with a 24 hour notice, to keep up on any maintenance issues, and see that the unit is being cared for.

9. Follow the rules of your city and state for evictions, if you make one mistake you may delay the process, and be liable for punitive damages.

10. Fix any needed maintenance issues as soon as possible, this increases faith in the tenant, and ensures that your investment is cared for, waiting may make the problem become more expensive.

11. If applicable by law, record all phone conversations you have with your tenants, and let them know ahead of time you will be doing so, this ensures accurate record keeping, if not, at least make a notation of each conversation for future reference with a journal.

12. Keep six months of rent back in a separate account, to be used for maintenance, and to help when the unit is not occupied by tenant’s. While it may be hard to hold six months back, consider holding every other month of rent back per unit, but do not delay, as the money will be assured when you need it most.

13. Make sure that before anyone moves in you get first and final months rent, and a security deposit equal to one months rent.

14. Give the security deposit back only after fixing any problems per the contract stipulation, if fixing the problem yourself give yourself $25.00 per hour plus cost of material. This must be made clear in the tenant contract under the security deposit. (You cannot charge for normal wear and tare.)

15. Video record the unit the day before someone moves in and the very hour after they move out.

16. Know the state and city laws front to back regarding tenant and landlord rights.

17. Be professional and courteous at all times, but do nor be overly friendly. This will keep the tenant from trying to take too many liberties on sliding on rent, and keep you from being emotionally vested if you have to evict.

18. Seek the advise of professionals for making contracts and eviction’s, as well as any wiring or plumbing work it will cost less and be less time consuming in the long run, and only use bonded and insured contractors.

19. Get rid of tenants that do not pay, or cause any criminal disturbances as soon as you are able, other tenants will not take you seriously if you let others default and live there for free, and you may lose good tenants at the expense of trouble makers.

Remember you are running a business , and deserve to be treated fairly and honestly, and treat others just the same. Never resort to threats or other undesirable acts and always follow the rule of law and morality in your dealings with others.