The following is Part 5 of a series by Eddy Boudiwan and George Hill on building a real estate investment portfolio. Be sure to read the other articles in the series to learn more.
I have assembled my team, decided on the areas I want to invest in and have completed the analysis on selected properties. Now what?
If the above all indicate a green light, tie up that property quickly to keep competitive offers at bay. Work with your salesperson and lawyer to place an appropriate offer. Always ensure that your lawyer reviews the original offer and every subsequent version.
You need to monitor your due diligence and financing term timelines, as they are stated in your offer. Give yourself enough time for financing, as the time frame is much different than when buying a single-family home. Your team will be instrumental in guiding you through the offer life-cycle until you close on the property.
In addition to the income and expense analysis we discussed in the fourth article of this series, it is important to also analyze the following items, which can provide you with an accurate picture of the property and its real value:
Income and expense statement verification
The income and expense items that you will need to qualify include, but are not limited to the existing leases, rent roll, tenant confirmations if there are no leases in place and utility bills for the previous 12 months.
If the seller claims to have done improvements on the property, ask for a list of the improvements and receipts. Watch out for any contracts that you may be assuming, such as water tank rentals and laundry machines.
Analyze all the expenses, ensuring they are in sync with the income and expense statement provided by the seller. Remember, assuming a five per cent CAP rate purchase price, for every $1,000 overstated in the seller’s net operating income, you overpay $20,000 in value that does not exist.
If this is your first time doing this, you may consider engaging an experienced investor who can be your sounding board on your acquisition.
Zoning and building code compliance
You have to be cautious when purchasing rental properties (especially multi-family ones). You may be under the impression that you are buying a 10-plex, only to discover that the building is only legal for eight units, rendering the extra two apartments illegal. If you buy the building and continue to operate the illegal units, you could face one of two possibilities: shut down of the illegal units or fines, development fees and a costly process to legalize them.
When your offer is accepted, make it a priority to contact the city and order a zoning and building compliance report. This package will explain what the property is zoned for and what you are allowed to operate there. It will also include a building code compliance and property standard report, which reports the number of legal units recognized by the city and any open work order issues.
Some properties, depending on age, may have a grandfathered status, allowing buildings to carry a maximum number of units. Make sure to confirm this on the reports, regardless of the seller’s claims.
Fire code compliance
Fire code compliance is fundamentally addressing the safety of the lives of the occupants, even in illegal units, in the event of fire and related peril items. A building that is zoned correctly may not be compliant with fire code and vice versa. Ask the seller for the latest fire inspection report or certificate on file. If the seller has nothing on file, you may decide to engage a fire inspection company. Fire retrofitting is a large expense. Make sure to hire someone who is familiar with the current fire code.
There are many more items to manage during the due diligence period, but we have highlighted those that carry the most weight. The team of experts you selected to work with you will be crucial assets in this stage and should be utilized heavily.
In our last instalment of this series, we will discuss property ownership and how to sustain your investment property moving forward.
Real Estate Rangers is a real estate investment team that locates, operates and maintains properties for investors. Eddy Boudiwan and George Hill are the co-founders of the company. They have partnered with Taft Forward Management as their acquisition arm. For more information, visit www.realestaterangers.ca.
