Investing in an apartment building is far more complicated than purchasing a single family home rental and therefore requires a much more thorough inspection. Apartment inspections reveal issues far beyond what a normal home inspection would uncover, including many of the "landmines" that can be devastating to as an investor. As an apartment investing beginner, it can be difficult to detect these subtle pitfalls that often lurk just below the surface. In this training, you'll discover how to inspect an apartment building like a seasoned professional:
When you purchase an apartment building, there are potential landmines that you must spot and avoid in advance. There are also smaller issues, bullets to dodge, that can also derail your investment if don’t catch them.
5 Landmines to Avoid
- Roof: Is the roof old or in disrepair? A new roof is a big ticket item.
- Plumbing: If the plumbing is antiquated, there will be leaks. And repairing plumbing inside the walls and underground is extremely expensive.
- Electrical: If the electrical in the building is outdated, you may have to replace it. Replacing the electrical throughout the entire building, from the ground floor to the top, represents big bucks.
- Furnaces: Are the furnaces on their last leg? The price tag to replace a furnace that heats a small eight-unit apartment building is $12,000. Now imagine the cost of replacing it on a 20 or 30-unit property. This landmine can destroy your investment opportunity.
- Foundation: If the foundation is starting to crumble it may not be repairable or could cost hundreds of thousands of dollars to repair.
5 Bullets to Dodge:
- Mold: Bathroom mold or green mold is a problem you can tackle. But other types of mold can derail your investment.
- Code Violations: Perhaps the property owner has a bad relationship with the city and there is a list of code violations. For example, maybe he’s not fixing loose steps and stairwells or there are missing banisters. If he's not fixing them, how do you get around that? What's are the costs? Are these deal killers?
- Zoning Infractions: Most beginners have no clue what a zoning infraction is. Let's say you wanted to purchase a six-unit property where the bottom unit was converted without permits or the area isn't zoned for an apartment dwelling. The city can come in and have you remove everything and they'll come and make sure you did it. Now the basement can no longer be used as an income producing dwelling which will hurt your numbers.
- Zinsco or Federal Pacific Electrical Panels: These electrical panels have caused fires and most beginner investors wouldn’t know anything about them. They are prevalent all over the United States and were used in apartment buildings, some of which caught on fire. There are class action lawsuits, but some of these buildings still have the panels.
- Moisture: Water is very intrusive and destructive. You need to spot moisture on the ceiling, floor, baseboards, or even in the outside parking lot. Excess moisture can cause extensive damage and can really cost you. Even the smallest water leaks are damage waiting to happen.
3 Reasons to Perform an Inspection
1. You Need to Know What's Wrong with the Property
Think of your property inspection like going to a doctor for an annual physical. You find out what's right with your body, but also what’s wrong with your body so you can work on fixing it. The same thing applies to an investment property. You need to know what’s wrong in advance, so you know the costs of repair.
2. A Full Property Inspection Sets You up to Renegotiate the Deal
Once you have your inspection done, you can go back to the seller and do your best to renegotiate the terms into a better deal based on your findings. Also, the inspection allows you to remove the emotions from the deal, so if you can't get better terms, you are able to walk away.
3. It is Your Responsibility as an Investor
Performing a full inspection is being a good steward over your money or your investors’ money. It's the responsible thing to do.
3 Step Apartment Building Inspection Formula
There are two different inspections you will need to complete. The first is the pre-site inspection which is critical for determining whether you move forward or pass on the property. Once you've decided to move forward, you will need to hire an inspector to do a full professional apartment inspection. Then, after the inspection is complete you negotiate and close the deal.
Step #1: Perform a Pre-site Inspection (It’s free!)
Web Search the Address
You begin your pre-site inspection by checking the apartment's location for undesirable factors, such as noise pollution from train tracks or proximity to landfills and cemeteries. This is also the time to see how far away it is from transportation, shopping, and restaurants. There's a helpful website called walkscore.com where you simply enter the address and it will produce a score for you.
There is a website called spotcrime.com which will give you an idea of what the crime is like in the area. Some of you are looking for crime free neighborhoods in the United States, which does not exist. Wherever you invest in an apartment building, there will be crime. But knowing the type of crime in the neighborhood can be very helpful.
Drive by Yourself
That first thing to look for when you drive by is the curb appeal of the property and the neighboring properties. I also like to do what we call the daughter test. The daughter test is simple. Imagine your daughter is turning 18 and she's looking for her first apartment. On a Saturday afternoon, you take her to look at apartments. When you drive up to an apartment complex, you will have an immediate impression of what it looks and feels like. If as a parent you feel comfortable having your daughter live there, it passes the daughter test. However, if you drive up and think there’s no way I’m letting my young daughter live there, then it fails the test.
Get a Boots on the Ground Opinion
Consult a property manager who is familiar with the neighborhood. The key is not to consult the current property manager, because they're not going to tell on them themselves. You need to get a third party, a new property manager to give you a fresh, unbiased opinion of the property, someone who has boots on the ground and knows what’s happening in the neighborhood. Are the rents going up? Is there progress in the area or is it on the 11 o'clock news every night? You probably don't know that, but a property manager who's not currently managing it, but manages other properties in the area would know that.
Make a Decision
Consider the results of the first four steps in the pre-site inspection and then make a decision. Do you move forward, or do you pass? You can see why the pre-site inspection is an important part of making a wise investing decision. Not only does it keep you from wasting time on inadequate properties, but it also saves you money. The pre-inspection is free and helps you determine whether you will move on to the professional inspection which will cost you money.
Step #2: Complete a Full Professional Property Inspection
After you have decided to move forward with the property, you will need to get a full property inspection. For this you will need to hire a professional property inspector who specializes in inspecting apartment buildings. They will inspect everything from the roof down to the foundation. Here are five tips on how to organize your professional apartment inspection:
Inspect All the Units, Not Just a Sampling
When you get quotes from inspectors they will ask if you want to be charged for a sampling of units or an inspection of all the units. You want all the units to be inspected, not just a sampling. The reason is if you have just a sampling done, you will likely miss the one unit where the tenant is awful, and the unit is trashed. Missing that one unit could cost you about $25,000 to renovate after you evict them. You don't want to miss that one.
You Need to Be Present and Present
What I mean by that is you need to be there at the inspection. Do not let the professional inspector go in alone and give a report because there is too much money involved. You need to be on location at the time of the inspection. You also need to be present during the inspection. Give the inspection all of your attention with no distractions.
Let me give you a quick example. I had an investor who wanted to help out and see the inspection done. So, he came but he was on his cell phone from the morning until lunch. I pulled him aside and said, "You know what? If you want to use your cell phone, go sit in your car. We don't need your help. Your money and our money is at risk. We need your eyes on the property and not on your cell phone. So, if you're not able to be present, you're useless." Your focused attention during the inspection is crucial. If you miss something it could cost tens of thousands of dollars to fix because you were texting somebody.
Bring a Property Manager Along
A property manager can look at the property from a different perspective. You need someone who's a local to the area and familiar with the operations of an apartment complex. The property manager is looking at it from an operational perspective, you are looking at the property from an investment perspective. You need that second pair of eyes.
If Needed, Bring a Roofer, an Electrician and a Plumber
If you look at the property and you can tell the roof is in disrepair, you might as well bring a roofer along. Or if the pipes are old, bring a plumber. They’re going to have to come back, regardless, so why not have them there to give you everything upfront while you have access to everything on the property.
Plan to Be There for the Entire Inspection
A full inspection of 5 units will take roughly half a day. If you have 50 units, it can take two days for them to go through all 50 units and you should be there for those entire two days.
Property Inspection Checklist
Here are the basics that are important for you to pay attention to during a full apartment inspection:
- Inspect the Roof: I put the roof as number one because often with larger apartment buildings, it's the roof replacement or roof repair that's the most expensive.
- Inspection of the Mechanical Systems: The HVAC, the furnace, the ACs. The inspector will let you know how much lifetime is remaining, or he will have you get an HVAC professional to tell you. As I mentioned above, in an eight-unit property where there's a furnace in the basement it’s a $12,000 replacement if you don't catch it. You don’t want to miss these big-ticket items.
- Structural Inspection: They will inspect the foundation, balconies, retaining walls, drainage, all the walls and the crawl space.
- Inspect Electrical: The electrical inspection is extensive, but I’m going to cover just two very practical things. The first thing to look for in your report is if you have Zinsco electrical panels or Federal Pacific electrical panels because those have been known to catch fire since their installation in the seventies. The second thing to look for is aluminum wiring. Aluminum is a great conductor of electricity, but it gets hot. Sometimes up in the furnace, it can overheat and catch fire. Many insurance companies will charge you exorbitant insurance fees or no insurance at all if you use aluminum as your wiring.
- Plumbing Inspection: Let's say you have 24 units, and you find leaky faucets. One leaky faucet will cost you a hundred dollars per month in wasted water. Imagine one unit having a leaky faucet in the bathroom, in the kitchen, and maybe the toilet's leaking. That's $300 per month going down the drain. And that's only one unit. It's important as they go through and look at the plumbing that they catch any leaks.
- Inspecting the Interior of the Building: They'll look inside the units, the living room, the bathroom, the kitchen. They go through everything and let you know what the issues are there.
Finally, if any of these items, the roof, mechanical, structural, electrical, plumbing, or interior have any issues, you need to bring in specialists after the inspection to give you a quote on the cost to fix them.
Step #3: Review the Report and Negotiate a Deal
Review the Report with the Inspector
It will take about three days to get the report, which will be 40 to 60 pages long. It is critical that you read it thoroughly and go over it with the inspector on the phone. As a beginner you need a highly experienced person to help you decipher what's important and what isn’t. What are the landmines, what are the bullets, and what are some things you don’t need to worry about? When students of our Protege Program do a full project inspection, we go through each line item with them to make sure we catch as much as we can. For most of our students, this is the largest financial investment they've made. With so much money at stake you have to make a wise decision.
Renegotiate the Deal
After you have the report and advice from your highly experienced advisors, go back to the seller to renegotiate the deal. There’s no such thing as “as is”. If there’s a four-foot gaping hole in the roof, I'm going to ask the owner to fix it. We go back and ask for whatever deficiencies we find on the property to be fixed or accredited for price reduction.
Make a Decision
After the negotiations it’s decision time again. Are you moving forward or not? If after the findings you discover problems and the owner is not budging on the price, it becomes a no go. Remember, you fall in love with the numbers, not the property. At this point you have already invested your money and time into the property and many beginners think, "I've put all this money into the property. I like the way it looks and I don't want to cancel it, because I put so much into it already." That's a bad mental state to be in. Again, I want you to fall in love with the numbers and not with the property. If it's a no-go because of all the reports, you need to pass on the deal. There are better deals waiting for you on the horizon.
Get the Deal in Writing
If you decide to go ahead with the deal, make sure whatever you agree to with the seller, or the agent is in writing.
Close the Deal!