Question:
“I want to buy an apartment building but I’m a little afraid the agent or seller will cook the books and my return won’t be what they say it is. What should I look out for?”
Answer:
You’re smart to be cautious.
Here’s a list of things I look for when I buy or represent clients buying investment property:
- Are the rents & expenses “Pro Forma”? (I think that’s Latin for “fantasy.”) Pro Forma basically means the numbers are what they “should” be, not what they actually are. Sometimes Pro Forma numbers are realistic; often not.
- Be aware that the property taxes will likely go up.
- Often the owner does property management, on-site management, repairs, & gardening, so they don’t show on the financials.
- Are there any rent concessions that aren’t showing, such as: “13th month free rent”?
- Are vacancies low (or high) due to the location & time of year?
- Which is better: low or high expenses? Low expenses could mean the building is in disrepair…or so good it didn’t need work. High expenses could mean it’s a high-maintenance property…or it they just did a lot of repairs and it’s in tip-top shape.
- It’s rare, but watch out for bogus or modified financial statements. Always look at the Schedule E. If you’re suspicious, use IRS Form 4506: “Request For Copy Or Transcript Of Tax.”
Hope that helps!
