In our previous post, Acquiring a Multifamily Property – Part I: Searching for the Right Deal, we explored how to identify promising opportunities in the multifamily market. Now, as you move a property under contract, the focus shifts to one of the most important phases: due diligence.
This is where savvy investors separate assumptions from reality. Due diligence isn’t just a formality—it’s your opportunity to verify the numbers, uncover hidden risks, and ensure the property truly aligns with your investment goals. Skipping or rushing this step can lead to costly surprises down the road.
At Pikes Northwest, with over 25 years managing, investing in multifamily and commercial properties across the Willamette Valley, we’ve guided numerous investors through this process. Here’s what we’ve learned makes due diligence effective and thorough.
Digging into the Rent Roll
The rent roll is your starting point—it’s essentially the property’s income blueprint.
Look beyond the surface numbers:
- Compare current (in-place) rents to market rates in the area.
- Note lease terms, including start/end dates and upcoming expirations.
- Review unit mix, square footage, concessions, delinquencies, and overall vacancy.
- Assess tenant concentration—too much reliance on a few tenants can spell rollover risk.
A common pitfall? Treating the rent roll as a guaranteed future performance. It’s a snapshot, so always validate it against historical data and local market trends.
Analyzing Operating Statements
Turn to the trailing 12-month (T-12) financials or year-to-date statements for a clearer picture of real-world operations.
Key items to scrutinize:
- Gross potential rent vs. actual collections (watch for loss-to-lease).
- Expense ratios benchmarked against similar properties.
- Fluctuations in utilities, payroll, repairs, and maintenance.
- Any non-recurring or one-time items that skew the numbers.
Cross-check these against the rent roll. Unexplained discrepancies? Dig deeper—they often reveal underlying issues.
Validating Net Operating Income (NOI)
NOI drives multifamily value, so confirming its accuracy and sustainability is non-negotiable.
During due diligence:
- Normalize expenses for a true operating picture.
- Adjust for realistic vacancy and credit loss.
- Include management fees (even if you’re self-managing).
- Distinguish operating costs from capital expenditures.
A sustainable NOI supports strong returns; inflated or unstable figures can erode them quickly.
Planning for Capital Expenditures and Reserves
Long-term ownership means planning for replacements and upgrades. Underestimating CapEx is a frequent investor mistake.
Evaluate:
- Past spending patterns.
- Immediate deferred maintenance needs.
- Future schedules for big-ticket items like roofs, HVAC, plumbing, and electrical.
- Lender-required reserves.
A solid CapEx plan preserves cash flow and protects your asset’s value over time.
Performing a Thorough Physical Inspection
Numbers tell part of the story—the physical condition tells the rest.
A comprehensive inspection should cover:
- Individual unit interiors (don’t skip this!).
- Building envelope (roofs, siding, windows).
- Mechanical, electrical, and plumbing systems.
- Common areas, landscaping, and site improvements.
Hire qualified third-party inspectors for objectivity, but I can’t impart how crucial a walk of the property by you truly is. Hands-on review often uncovers details reports miss.
Reconciling Issues and Adjusting the Deal
Due diligence rarely reveals a perfect property—but that’s okay. The goal is informed decision-making.
When findings surface:
- Negotiate price reductions or seller credits.
- Request repairs or concessions.
- Renegotiate terms.
- Or, if risks outweigh rewards, walk away.
Experienced investors know exiting a bad deal is often the best return.
Why Thorough Due Diligence Matters
This phase is your final safeguard before taking ownership. Treat it with the discipline it deserves, and you’ll avoid inheriting preventable problems.
At Pikes Northwest, we assist clients not just in management but in acquisitions—leveraging our local expertise to spot opportunities and risks in the Willamette Valley multifamily market.
Stay tuned for Part III, where we’ll cover financing strategies, loan options, underwriting, and how leverage impacts your risk and returns.
If you’re considering a multifamily acquisition or need expert guidance on due diligence, contact us today at 503-588-3586 or info@pikesnw.com. We’d be happy to discuss how we can support your investment goals.
Pikes Northwest – Your Trusted Partner in Willamette Valley Commercial and Multifamily Real Estate
My name is Alyssa Flores. I was raised here in Salem, Oregon. I’ve been working in property management for the past 6 years, and am excited to be part of the Pikes Northwest team. In my spare time I enjoy being with my family and friends.