The Real Reason Most Multifamily Deals Fall Apart After Closing

Everyone who looks at a multifamily deal looks at the same things.

The rent roll. The cap rate. The number of units. The occupancy rate. The neighborhood. Maybe the condition of the kitchens and bathrooms if they are being thorough.

Then they close, get the keys, and spend the next eighteen months bleeding money on things they never looked at.

The systems.

I have done dozens of multifamily deals across every size and asset class. The deals that surprised investors after closing almost never surprised them because of the tenants or the market or the management. They surprised them because something in the walls, under the building, on the roof, or in the mechanical room was at or past end of life and nobody looked at it carefully enough before the contract was signed.

Here is what you actually need to evaluate before you buy any multifamily property.

Plumbing

Older multifamily properties in Houston and across most of the Sun Belt were built with cast iron drain lines that deteriorate from the inside out. They look fine from the outside. They are collapsing on the inside. A sewer scope on every main line in the building is not optional. It is the first thing I order on any multifamily acquisition built before 1985.

Supply lines matter too. Galvanized steel supply lines in older properties are corroding from the inside and restricting flow. The tenants complain about water pressure. You replace fixtures trying to solve the problem. The problem is in the walls.

Know exactly what material your supply lines and drain lines are made of, their age, and their condition before you commit to a purchase price. The cost of replacing plumbing in an occupied multifamily building is not a small number and it does not get smaller by waiting.

Electrical

Panel capacity and condition on every unit and on the main service. Federal Pacific and Zinsco panels are fire hazards and virtually uninsurable. They are also extremely common in multifamily properties built between the 1950s and 1980s.

Aluminum wiring is another issue that shows up regularly in this asset class. It requires specific remediation and specific outlets and switches rated for aluminum wiring. Standard copper-rated devices installed on aluminum wiring are a fire hazard.

Get a licensed electrician to assess the entire electrical system before closing. Not a general inspection. A dedicated electrical assessment from someone who is looking specifically at panel condition, wiring type, grounding, and code compliance. The findings from that assessment belong in your renovation budget before you agree to a purchase price.

HVAC and Boilers

Individual unit HVAC systems are expensive to replace and in a multifamily property you are not replacing one. You are replacing however many units have failed equipment. Get the age and condition of every system in the building. Budget for replacement on any unit that is within three years of end of life because end of life in a rental property happens faster than it does in an owner occupied home.

Boilers in older multifamily buildings are a category entirely unto themselves. A boiler serving multiple units is a single point of failure for heat and hot water across the entire property. When it fails it fails for everyone simultaneously and the repair or replacement timeline is not the tenant's problem. It is yours.

Know the age, the service history, and the condition of every boiler in the building. If the seller cannot produce service records assume the worst and price it accordingly.

Roofs

A multifamily roof is not one roof. It is often thousands of square feet of roofing surface covering multiple structures, multiple slopes, multiple penetrations, and multiple drainage points. The cost of replacing it reflects all of that.

Get a dedicated roofing contractor to walk every square foot of the roof and produce a written assessment with an estimated remaining useful life. If the roof is within five years of end of life budget for full replacement. A roof that fails on an occupied multifamily property is not just a repair expense. It is a habitability issue, a liability issue, and potentially a loss of rental income issue simultaneously.

Drainage and Grading

Water that does not drain away from a multifamily building ends up in the foundation, the crawl space, or the basement. In Houston specifically where the soil is clay and the rainfall is significant drainage is not an afterthought. It is a primary structural concern.

Walk the property during or immediately after a rain if you can. Look for standing water, erosion patterns, and areas where water is draining toward the building instead of away from it. Look at the condition of gutters, downspouts, and any surface drainage infrastructure. The cost of correcting drainage problems after closing is real and it does not show up anywhere in a standard inspection report.

Siding and Building Envelope

The building envelope is everything that separates the inside of the building from the outside. Siding, windows, doors, flashing, and caulking. When the building envelope fails water gets in. When water gets in long enough mold follows. When mold follows you have a habitability issue, a health issue, and a remediation expense that grows every month it is not addressed.

Look specifically at the condition of flashing around windows, doors, and roof penetrations. Look for siding that is cracked, warped, or pulling away from the building. Look for caulking that has failed around any penetration in the exterior. These are small items that produce large damage when ignored.

Insurance

This is the one that surprises investors most consistently because they do not think about it until they call their insurance agent after closing.

Multifamily insurance is not multiples of single family insurance. It is a completely different product with completely different underwriting criteria. The age of the building, the construction type, the roof condition, the electrical system, and the claims history all affect what coverage is available and at what cost.

Get an insurance quote on the actual property before you close. Not an estimate. An actual quote from an insurer who has reviewed the specific property. The difference between what you assumed insurance would cost and what it actually costs on an older multifamily building can materially change your cash flow projections.

Properties with deferred maintenance, older electrical systems, older roofs, or prior claims history are either expensive to insure or in some cases difficult to insure at all. Know this before you own the building not after.

The Summary

The rent roll tells you what the property earns. The systems tell you what it is going to cost.

Most investors spend ninety percent of their due diligence time on the income side of that equation and ten percent on the expense side. The investors who get surprised after closing almost always had that ratio backwards.

Before you buy any multifamily property get a complete assessment of every major system in the building. Plumbing, electrical, HVAC, boilers, roof, drainage, building envelope, and insurance. Price every system that is at or near end of life into your renovation budget before you agree to a purchase price.

The deal that looks good on the rent roll and falls apart in the mechanical room was never a good deal. You just did not know it yet.

Find out before you close. Not after.

Buying a multifamily property and want someone who has been on both sides of these deals to review what you are looking at? Schedule a call at calendly.com/jeph-reit