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Due Diligence: What Most Investors Miss

Due diligence is a vital step of acquiring a multifamily investment property. What is due diligence?

Due diligence is a thorough examination of the property, the deal, and the finances behind it all to determine risk. It’s as important to inspect the roof and mechanical equipment as it is to ensure there aren’t any code violations or existing liens on the property.

According to Gage Multifamily Estimator / Account Representative, Joshua Meldru, due diligence checks point out immediate failures in the property that will likely require immediate and potentially costly expenses in the future. If your plan for the property is a value-add strategy, a due diligence advisor can help you identify areas where you can add immediate value to your investment.

Documents to request:

As-built plans of the property, the certificate of occupancy for building, and environmental reports on building materials. You should also do a check to determine if there are any existing municipal code violations or liens on the property.

What should you pay attention to when doing due diligence walks?

Exterior Carpentry:

Start at the exterior carpentry. Are there any areas where there is wood rot? Check the fascia and roof areas for leaks. Exterior carpentry may be a place to add value by repairing and replacing rotted materials and applying a fresh coat of paint.

Balconies & Railings:

Are the building railings in need of attention? Repairing and replacing railings in a community offers safety and adds curb appeal which draws renters in and keeps them leasing.

Any property built more than 15-20 years ago is likely not up to the current building code and could incur major renovation costs down the road.

Plumbing:

If your building was built in the 1980s, Joshua recommends checking the plumbing for PVC supply lines.

PVC is a plastic material that degrades over time and fails. Installing new stainless braided supply lines adds value and avoids flooding. PVC supply lines can be found at kitchen sinks, and bathroom sinks, showers, and toilets.

Electrical:

For buildings built in the mid-1960s through the '70s, be wary of aluminum wiring. Many lenders will require an upgrade to copper wiring.

Before 1969, outlets were not grounded, which is an important safety feature and is the current standard electrical code. Grounded outlets (three-pronged) have a wire running back to the power source that absorbs excess electrical energy in the event of a power surge.

Federal Pacific or FPE Stab-Lok breaker panels: These breaker panels were installed from the 1950s to the 1980s and are known to cause fires. Lenders typically require all Stab-Lok panels to be updated.

HVAC:

Get a good sense of the overall HVAC system, including freon types, manufacturers, tonnage, and the condition and location of the condenser units.

Plumbing:

Does the property have water shut-off valves? These are essential when making repairs so that you do not have to shut the water off to the entire property to make a simple repair to one unit.

Was the asset built before 1975? You may have cast iron pipes for sewer lines, which will corrode or break over time.

Drive-by at Night:

Drive around the property to assess lighting and safety issues. How well lit is the property? Does the property feel safe and secure? This is important for leasing purposes. Quality residents want to feel safe.

Gage Multifamily is an expert in helping investors properly review a multifamily investment - from determining the overall health of the property to strategizing how best to add value to your new investment through renovation.