Make an Educated Decision When It Comes to Buying Multifamily Property.
Investing in a multifamily property can be financially advantageous and allow you to build a passive income portfolio more quickly. However, these types of properties also include increased responsibility, liability, and capital reserves. Below are our top five things to consider before investing in Los Angeles multifamily properties.
1. Choose the Best Advisors for Your Situation
Your experienced team should include a broker, attorney, and lender in the beginning. They will guide you through local practices and customs as well as help you determine the most important items to review during the due diligence process. You’ll examine everything from the physical aspects of the building to the financials and cash flows.
2. Consult With Specialized Contractors
It is always best to seek the opinions of local contractors to give you their assessment of each major system or component of the building. If you can, also talk to the tenants directly to get honest feedback about the building's condition and potential problems.
You’ll want to buy based on where you fall on the “do it yourself” or “have someone else manage it” spectrum, and understanding the condition of the property is paramount in determining how much work will need to be done.
3. Analyze the Financials
Have your agent request income and expense statements for the current and previous years, current rent rolls, service contracts, and all existing reports available. Also, be sure they verify proof of rental payments and copies of leases. Make sure the historical information matches your expectation of the current operations. If it doesn't, find out why.
4. Have Cash on Hand for the Unexpected
Repairs, erratic rent collections, and downturns in demand are just a sample of the potential challenges multifamily property owners face. Each of these issues can impact your operating capital in a negative way.
Begin planning for less-than-ideal occurrences by becoming familiar with the vacancy rate in the neighborhood. Run “what-if” scenarios to get an idea of cash flow with different vacancy situations. Most importantly, always have a reserve for repairs. A safe formula is taking 10-15% of the rent of each unit and contributing that to your repair fund.
5. Consider a Property Manager
A property manager to handle day-to-day issues for tenants and repairs could help you ease into your first multifamily building purchase.
Each market has its own idiosyncrasies for landlord-tenant relations, advertising, leases, and disclosures. An experienced property manager can handle these details along with emergencies and other on-site issues, leaving you time and energy to continue to build your business portfolio.
Do you have other questions or concerns? Please don’t hesitate to reach out to us
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