What should I look for when I walk a multifamily building?

What should you actually look for when you walk a multifamily building?

You are not looking for a reason to walk away. You are looking for one number: what it will cost to get this building to the condition your plan already assumes.

Most first-timers walk a building the way they walk a house they might live in. They react to what they see. Stained ceiling, bad feeling, move on. An operator walks the same building with a notepad and a running total, giving every item a rough cost and a rough date, treating nothing as a verdict on its own.

Reacting is expensive in both directions. It kills fixable deals, and it lets cheap-looking disasters through.

If you own a single family rental you have done a version of this, but the stakes scale. On a house a surprise repair is an annoying weekend. On a six unit the same surprise arrives six times, and it lands on a loan that is watching your numbers.

The useful way to hold it: the listing gave you the building's income, the walk gives you its condition. Until you have walked it, you are underwriting half a deal.

Does what you find on the walk change the cap rate?

No. This surprises almost everyone, and understanding why is most of the value of the walk.

Start with the words, because they get used loosely. Net operating income, or NOI, is what the building earns in a year after operating expenses and before the mortgage. Cap rate is that yearly profit divided by the price, so a building earning 35,000 dollars priced at 480,000 is roughly a 7.4 cap. It compares two buildings on one scale, nothing more.

Debt service coverage ratio, or DSCR, is that same yearly profit divided by your yearly loan payments. It is the lender's test that the building pays its own mortgage, and most multifamily lenders want at least 1.25. Cash-on-cash return is the yearly cash you keep, divided by all the cash you put in: down payment, closing costs, and repairs.

Here is the key. A roof, a parking lot, a set of water heaters are one-time costs, not yearly operating expenses. They never enter the yearly profit, so they do not touch the cap rate and they do not touch the lender's coverage test.

What they touch is your cash, and the return you earn on it. Two buildings with an identical 7.4 cap can hand you very different cash-on-cash returns, and the difference is often sitting in the parking lot. So the walk cannot be skipped, and panicking about what it finds is still a mistake. The lender's test does not care. Your bank account does.

One thing to separate out. The yearly amount you set aside for future big-ticket repairs is a real operating expense and does belong in your yearly profit. That is a different number from the one-time budget this article is about. If you have not corrected the yearly side yet, do that first, because what most people miss when they underwrite a small multifamily sits upstream of everything here.

What did the walk do to one illustrative 6-unit?

It moved the repair budget from 45,000 dollars to 78,000, cut the return on invested cash from 4.8 percent to 3.9 percent, and left the cap rate and the coverage test untouched.

The building. A 6 unit listed at 480,000 dollars, a different illustrative building from the one in Parts 1 and 2. Six units at 975 dollars a month, so 70,200 dollars of rent a year if every unit stays full. After 5 percent for vacancy and 31,000 dollars of corrected operating expenses, it earns 35,690 dollars a year before the mortgage, which is a 7.4 cap at the asking price. Every figure here is illustrative.

Two floors were set beforehand: lender coverage of 1.25 and 500 dollars a month in cash flow. The deal clears both, and it clears the lender's by almost nothing, 1.26 against 1.25. Which loan you use sets that coverage floor, and the two common paths do not set it in the same place, which is worth reading before you assume the 1.25.

Repairs planned from the listing photos: 45,000 dollars. Four unit refreshes and a roof allowance. Cash to close was 96,000 dollars down plus about 12,000 in closing costs, so total cash in was 153,000 dollars and the return on that cash was 4.8 percent.

Then the walk found another 33,000 dollars across five items. A rear porch support post sitting on cracked brick and pulling away from the building. A parking area patched over the years and never resurfaced. Four water heaters with no drip pans, sitting above finished floor. Original bath fans in all six units, loud enough that tenants will not run them. Gutters full, with downspouts draining against the foundation.

Nothing above the repair line moved. The yearly profit, the cap rate, the loan coverage, and the cash left over each month are all exactly where they were, and the deal still clears the 1.25 coverage floor and the 500 dollar a month floor. What broke is the cash. You are 33,000 dollars short of the plan you walked in with.

That is the whole lesson. The walk did not tell you the deal was bad. It told you the deal costs more than you thought. Those are different findings, and they have different answers.

Should you walk before or after you make the offer?

After. Walk once you have an accepted letter of intent and before you sign the purchase agreement.

Two terms, new to most people coming from single family. A letter of intent is a short, non-binding document saying you intend to buy at roughly these terms. The purchase agreement is the binding contract that follows, and signing it usually means putting down earnest money that is at risk if you back out for the wrong reasons.

Walking before you offer wastes time on buildings that were never going to price. Walking after you sign means renegotiating from a worse position with money already committed. The window between the two is where your leverage sits: you have the seller's attention and you have not committed anything yet.

This assumes you decided your price and your walk-away number before you submitted. If you set your top price at the table, after you have already fallen for the building, the walk will not save you.

Then re-run it. You came back with a corrected repair number, so put it into the model and see what it does to both floors. Not just the return. The cash too.

Senjo already holds your capital position, your cash flow floor, and your credit tier, so the corrected number goes in and the read comes back against your plan rather than a generic benchmark, along with the price the deal would have to move to in order to clear. It does not inspect buildings, estimate repair costs, or quote contractors. You supply the number the walk gave you.

Next in the series. Part 4 covers sorting what you found and the three ways to get the money back: which problems should actually stop a deal, and what to do with the number once you have it.