Are you realizing that it’s time to build your real estate portfolio or add an income stream? In this three-part series of articles, I outline why owning a multi-unit rental property could offer benefits beyond single-family rental properties. In my previous article, Part 2 of the series, I detailed areas of consideration for financing and for evaluating a multi-unit property. I also pointed out quick rules of thumb that lenders -- and you, as a potential buyer -- need to review. In this article, I will discuss insurance, closing day, apartment management, and expenses – all of which are critical to your ownership of a multi-unit residential property.
Just like financing for the multi-unit residential building, insurance for a multi-unit building is a specialty. Before acquiring an apartment, you will want to become familiar with insurance agents that offer commercial insurance. Apartment insurance quotes can vary widely for the same coverage. Insurance is part of an overall protection package, along with your form of ownership as an LLC or LLLP. Apartment policies typically include a few unique features, such as building ordinance and law coverage. For instance, if you have an older building and it burns down, the new building codes may be different than the code when the building was built. Building ordinance coverage can help cover the higher cost of complying with a building ordinance or law when reconstructing a building after it has been damaged.
Closing day for a multi-unit building has the same basic format as a closing for a house. There are, however, a few unique forms, such as assignment of leases, tenant estoppels, the pro-ration of rents, and the transfer of security deposits.
Professional management is a must for the multi-unit residential building. An owner or individual could act as their own management, but a professional property manager will secure better rents, better deposits and will do a much better job at screening the tenants. In addition, a property manager can usually help you keep control of expenses by having several of their own maintenance people on staff. In a large building, some professional managers even hire a resident manager to help with day-to-day duties. A professional manager is also able to stay up to date on new laws and trends affecting property owners that an individual owner may never even know about. A great example is the Lead Base Paint Disclosure. The owner is required to give a Lead Base Paint Disclosure with any leases of apartments in buildings built prior to 1978, whether lead based paint was ever used or not. Many individual owners that I meet have never done this, and the fines are substantial. Because all the units are grouped together, typically the management fee for a 25-unit building, as a percentage, will be less than the management fee for 25 individual homes.
Multi-unit buildings will often have a common laundry facility. These machines are seldom owned by the owner of the building. They are usually provided by a service such as Automatic Laundry. Automatic Laundry will service the machines, collect the revenues and pay the building owner a commission. Laundry companies will often have long term contracts that may transfer with the building upon purchase. Laundry contracts should be reviewed along with all the other due diligence items.
Sellers of buildings will often deliver an expense report to the prospective buyer. These reports should be reviewed with a realistic analysis of expenses based on both the current owner’s numbers and a projection of future expenses predicated on current trends.
Make sure a seller’s report is complete and includes entries for the following: principal, interest, taxes, insurance, water, sewer, common utilities, management, advertising, legal, snow removal, yard care, regular maintenance and supplies, vacancy, accounting, and miscellaneous.
This completes my three-part series of articles about purchasing a multi-unit residential property. As you explore this idea and move forward, be sure to pull together a team that includes a mortgage loan officer, financial planner, accountant, property manager, insurance agent, and Realtor to consult with.
About Duane Duggan: Duane Duggan has been a Realtor® for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, REALTOR® for Life. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.
For questions, email Duane at DuaneDuggan@BoulderCo.com or call 303-441-5611