Two of the most important things to understand when purchasing a multifamily property are the expenses and improvements. Most beginning investors pay attention to the fancy broker package and the POTENTIAL income of a property. While it is important to understand your rental income both today and in the future, it is more important to understand the required improvements and operating expenses of the property. We always recommend using a professional COMMERCIAL building inspector before purchasing a multifamily building. They will provide you with a detailed report of the items that need to be addressed immediately and in the future.

1. Deferred Maintenance
1. These are items the previous owner has neglected over the years and you will need to address to bring the property up to its market potential.

1. i.      This could include: peeling paint, damaged roofing/siding, insect issues, landscaping, hanging  gutters, concrete/parking lot repairs etc..
2. i.      This could include replacing items such as: Roofs, Windows, Siding, HVAC systems, flooring, electrical etc

2. Capital Improvements
1. These are typically one time major “capital” improvements you will have to perform for the property to reach its full potential

In regards to ongoing operating expenses of a property there are two main buckets those expenses will fall into: Fixed Expenses and Variable Expenses. When reviewing a potential purchase you should expect to receive what is called a Year to Date Operating Statement from the current owner, this document should outline the income and expenses associated with running a property. NEVER take what the seller gives you as absolute truth-you must always verify expenses and speak to local management to ensure the expenses you are projecting are in line with similar properties in the current market. Below is a breakdown of common fixed and variable expenses.

1. Fixed Expenses
1. Taxes, Insurance, Utilities, Trash
2. Variable Expenses
1. Management, Maintenance, Turnover Costs, Payroll, Grounds Maintenance, Advertising, Legal, Accounting

Having a good understand of your expenses when projecting the performance of a property  is essential for your success. This will allow you to be well prepared and also identify inefficiencies in current operations and ultimately find ways to increase your Net Operating Income.  A rule of thumb to use when analyzing a property’s potential net income is to use your Gross income (after vacancy) and subtract 50% to get to your potential Net Operating Income.

-          Christopher Urso, founder of National REIS and URS Capital Partners

This is the “quick and dirty”  no frills outline of  buying buildings, from 2 to 200+ units.  Assuming you have identified a market that you feel comfortable investing in I have outlined the key action steps to take when purchasing an apartment complex.

1. Contact local brokers that specialize in multifamily property
2. Contact local property managers-make sure they have experience managing the types of properties that you are targeting
3. Establish your target price point of the property you would like to purchase
4. Establish the returns you require from your investment
5. Begin analyzing deals and surrounding neighborhoods, you have to understand market rents and vacancy rates of similar properties
6. Have a clear plan on how you will finance your purchase Conventional, Seller Financing, Private Money, Equity Partners
7. Establish an offer price based on your required return
8. Create and Submit a Letter of Intent
9. Perform Physical Inspections-ALWAYS INSPECT EVERY UNIT WITH A  PROFESSIONAL INSPECTOR
10. Put your financing plan into action
11. Get your management team involved in the process
12. Close on the deal – CELEBRATE!
13. Establish an ongoing communication plan with your management team
14. Should be at least a monthly call (could be as much as weekly for larger properties)
15. Collect your rent checks
16. Look for another a deal

-          Christopher Urso, Founder National REIS and URS Capital Partners