In the hunt for cash flow, the value of investment properties, in particular multi-unit properties, are directly related to how much income/profit it produces for its owner. Unfortuantely, it’s often in the seller’s best interest to provide numbers that are more “appealing” than they are accurate; for example, a seller may give high estimates of rental income or neglect to mention certain maintenance expenses to give the impression that the property is more valuable than it is.
A key part of your job is to make sure you have the best information available when doing your financial analysis.
So how do you do that?
Well, while you may rely on “pro-forma” data from the seller to narrow down your search and begin discussion on a property, you must ensure that before you actually close on the deal that you get actual data about income and expenses. You should ask to see previous years tax returns (schedule E reports will be a good source), property tax bills, maintenance records, etc. Hopefully all the actuals will prove similar to the pro-forma data you had previously been given, but don’t be surprised if it doesn’t. Remember, the seller is trying to make a sale, and will often get creative to make the numbers seem better than they are.
In addition to getting actual data from the seller, you should do your best to ensure there are no surprises if you were to buy the place. For example, when was the last time the property was assessed for taxes? If it was a while ago, and values have increased significantly since then, it’s possible that the property will be reassessed very soon, and property taxes will increase.
Another example is a property showing unusually low vacancy rates. What are they doing to keep the tenants there? Does the tenant pay on time? When does the lease expire? Is there a high quantity of maintence to be uncovered once they vacate?
Remember, even small changes to the income and expense numbers can mean big changes in your bottom line.
In the end data reduces risk.