I am learning about investing in multifamily real estate (apartments). I understand some of the key figures for evaluating multifamily properties, such as CAP rate and cash-on-cash returns.
All of these calculations rely on historical revenue and expense data provided by the seller. The seller should be motivated to portray their property in the most favorable light possible so they can get the best price/
What's to keep them from fudging these numbers? How do I really know the occupancy rate, rents and expenses are what they say they are?
Expenses in particular seem easy to lowball, either through intentional deception or honestly, just due to different options different owners have.
For example an owner who is also a plumber or contractor, or who has a brother who is an electrician or whatever, could do a lot of work themselves or at discounted rates that result in significantly lower expenses than another owner could, which could lead to more a very favorable CAP rate.
I understand the flip side of this is what makes multifamily investments potentially good opportunities: through better management (including doing things yourself, or making improvements that can justify increased rents), you have better upside than the current owner (you hope).
Do most investors just accept the seller's historical expense and revenue data as the gospel truth?
Is there any recourse if they turn out to be materially different than reality?
For example what if the owner said occupancy was 95% but after the purchase you find this figure was inflated?
Or you find there was a significant hard dollar expense that was not included in the data presented by the seller prior to the sale?
Or you find there was a significant repair the seller did themselves at zero labor cost?
Caveat emptor and all that...but should you believe anything you are told? Is it all stuff you need to really do your own homework on and arrive at your own conclusions...for example if every other property you look at of similar size and age have consistently higher expenses, do you just walk away?
I figure you need to make your own projections of future expenses based on your own (or your paid professional's) inspection of the property. For example if all of the refrigerators and washers/dryers are 20 years old, you can expect to have to replace a lot of them in the near future.
How far back do you typically get data in evaluating a property? If all the appliances were replaced 3 years ago, appliance repair and replacement costs will be very low for the immediate prior 12 months for example, again resulting in a more favorable CAP rate.
Here's an example: http://www.ballard10.com/page2.html While the utilities, taxes, and insurance are probably trustworthy exact figures, that "misc." expense of $1600/year seems suspicious. It must include 100% of the maintenance expenses. Having to replace a couple of appliances, deal with a leak in the roof, or do some painting and that figure will balloon by thousands of dollars.
