It isn’t the most interesting topic to most people, but there’s no avoiding the subject of property inspections if you’re a multifamily investor.
Without a proper inspection, you’re truly flying blind when investing in real estate.
You’re investing in a physical asset that has many components that require care, maintenance, and eventual replacement.
It’s irresponsible to neglect the need for a property inspection and you will eventually pay for your oversight if you buy properties without a thorough inspection.
We recommend working with a professional property inspector that specializes in multifamily properties for this reason.
Property inspections are a critical due diligence item and you can’t properly underwrite a property without one. Beyond simply looking for any problematic materials or systems, property inspections are part of your overall analysis of the asset.
Knowing how to set your operating budget and your capital expenditure budget is impossible without a property inspection.
These items are critical in your underwriting. Major building systems do not last forever and have varying lifespans.
If your roof is nearing the end of its lifespan within the next five years, you need to budget for replacing it, for example. Your property inspection informs your capital expenditure budget in both the near and long terms.
Below are five of the major areas your property inspector should be looking at during your property inspection.
Being familiar with these as the investor will allow you to better understand the implications of your property inspection report. It will also allow you to thoroughly vet property inspectors before hiring them.
If they’re not familiar with the items on this list, hire someone else!
1. Building Envelope:
Water and associated weather related issues are enemy number one as a multifamily investor.
Water issues usually stem from good old mother nature herself, but you also have to look out for water issues that originate from the interior of the property.
The first place that we’re concerned with water issues is the building envelope. Your building envelope is your barrier from the outside world to the inside space of the building.
The building envelope is made up of the foundation, roof, walls, doors, windows, insulation, and ceiling. It’s your first line of defense against mother nature and is one of the most important areas to inspect thoroughly prior to purchasing any property.
We cover the building’s roof as its own section, since it is such a major component of the building envelope, but you can’t neglect the other components of the envelope.
They are also constantly exposed to the elements and serve as a possible source of trouble for you in the form of water damage if they are not in working order.
That’s why you need to insure the building envelope is in good condition. The main thing here is to look for signs of water intrusion.
Different types of siding also have vastly different lifespans and require different degrees of maintenance.
Wood siding, for example, needs to be painted every 4-5 years to properly seal the envelope and prevent weather and water intrusion.
Look for staining on ceilings or around windows, as this is indicative of water damage.
Another good method to assess for water damage in the interior of your building is pushing on the shower walls’ backer board to assess for dampness.
This can be a sign of interior water damage from your plumbing systems or improperly installed tile.
You also need to look for issues with the building’s foundation. Some of the things you need to look for here are foundation shrinkage or expansion. Concrete will naturally shrink as it cures, but excessive shrinkage can pose a problem.
Look for shrinkage near doorways and under basement windows. Foundation expansion is more of a concern for brick or brick-containing foundation. As time passes, brick grows and expands by absorbing moisture.
It’s difficult to differentiate between problematic cracks or typical settling cracks without the help of a property inspector. Typical settling cracks are small and do not grow as time passes. Signs of more serious problems include wall cracks running at 45 degree angles, difficult to open windows and doors throughout the property, cracking on the roof, and water intrusion at the basement level.
Properties with these problems will require significant foundation repairs to be restored to proper working order.
Another issue that can cause damage to your foundation in the long term is water draining too slowly. Check the property’s parking lot and other areas of the landscaped space for water pooling and signs of improper drainage.
Your roof is the leader of the building envelope. Standing high above the other components, the roof is also the most at the mercy of the elements.
The obvious part of a roof inspection is assessing for any current major issues, such as holes that need patching, staining on flat roofs, or other typical problems that come from wear and tear.
Beyond that, however, your roof inspection should also consist of looking for errors in installation, such as improper flashing, as well as the remaining lifespan of material.
Remember that even if your roof is in proper working order, that doesn’t matter if it’s at the end of its lifespan.
Beyond your own budgeting, insurance companies will typically want to see that the roof has at a minimum 3 years of remaining lifespan to provide coverage for the property.
3. Electrical Systems:
The building’s electrical systems are an area that deserve some serious attention due to how dangerous electrical problems can become.
One important component of your electrical inspection will include looking for undersized wires or dangerous open wire splices.
This is a major area you need to be focused on for properties older than thirty years.
Many may be familiar with obsolete wiring systems you see in older homes such as knob and tube wiring.
What you may be unaware of are that there are unsafe wiring in buildings constructed as recently as the 70’s. Single strand aluminum wiring, for example, is an unsafe fire hazard.
There are older electric panel brands, such as Federal Pacific Electric (FPE) panels, that were produced all the way into the 1980’s that contain unreliable “stab-lok” breakers with above average failure rates.
This is critical to understand as they also may pose a fire hazard and have led to fires in the past.
Don’t be surprised if you purchase a property with an older vintage when your insurance inspector checks every electric panel in the property.
If you failed to conduct proper due diligence, you might be forced to replace the unsafe panelling that you failed to identify.
In order to invest wisely, you would need to be aware of the need to budget for these panels being replaced, which would be difficult to do without the help of a professional property inspector.
4. Plumbing Systems:
Your building’s plumbing system is another of the core components of a residential property and warrants thorough inspection prior to purchase.
The main thing we want to look into on the plumbing side of things is drainage. Proper drainage is essential and clogged lines can cost you tens of thousands.
Cast iron pipes are a major concern and are common in many parts of the country. These pipes corrode and deform, causing blocks or even leaks in cases of heavy corrosion.
Scoping your drain lines with an in line camera will let you know whether you need to budget for replacement with modern PVC piping.
Your supply lines may also be a source of concern. You might be surprised to hear that polybutylene supply lines were used extensively in the late 1980’s and early 1990’s.
These were a popular choice and considered an advancement in the plumbing arena due to their low cost and ease of installation.
Unfortunately, these pipes are reactive to certain oxidants present in trace amounts in water, such as chlorine. This causes degradation and flaking of the piping material into the water – obviously not something we want.
These pipes are also prone to leaking, which is especially costly to you as the property owner for supply line piping.
As you might imagine, sorting out what piping materials are used in a property you’re purchasing is best left to the professional property managers. Even seemingly newer looking pipes may cause problems for you down the line.
5. HVAC and Water Heaters
You’ll also want to look into the heating and cooling systems for the property. It’s important to assess the age of the property’s AC units and water heaters, for example.
The average age of air conditioning systems ranges from 10 to 15 years, depending on the climate of where the property is located.
Air conditioning systems can also effect indoor air quality. Inspect and regularly clean the evaporator coils. It’s also a good idea to install a water detection device on the condensation line.
Preventing clogging in the condensation line will save you thousands of dollars in water damage remediation costs.
Your property inspector will be aware of these best practices and can advise if they are being used or where they should be implemented so your HVAC systems remain in perfect working order.
You’re only doing your job as an investor to conduct extremely thorough due diligence when purchasing a multifamily property. It’s in your best interest to find and work with the right inspector in each market you’re investing in. They are the protectors of your future cash flow by preventing you from walking into a series of unforeseen expenses.