Multi-family real estate investment is an excellent way to create a sustainable income and boost your net worth over time. However, it’s vital to remember that the stakes in multi-family property investment are high, demanding a higher level of due diligence. Compared to single family homes, the legal issues surrounding these properties are more complex and your potential liability is higher.
1. Compliance with Zoning Regulations
At first, you must determine that the multi-family real estate investment that you are considering conforms to the local zoning laws. The property should ideally have a “permitted use” status under the latest zoning regulations in the region.
However, sometimes the property you are considering presents a compelling opportunity, but it is not a permitted use. In that case, you should find out if the property has a “legally non-conforming use” status. This means the multi-family you are considering may have previously been a permitted use. You can still safely invest in such a property.
What you need to guard against is a situation where an owner unlawfully converted a building to a multi-family in a zone where multi-families are not allowed. That would be an illegal property that you must avoid.
2. Tenant Issues
In a multi-family property investment with existing tenants, it is vital to carry out due diligence with regard to their history of making rent payments and conforming to the lease terms. This will ensure that you do not face any unpleasant surprises later on, such as discovering that the tenants have not paid the rent for months.
To avoid the possibility of getting embroiled in lawsuits later on, you may consider a legal step called the estoppel certificate. In this legal document, the tenants and the previous owner will declare that the respective leases are being fully complied with, and no tenant is in default.
3. Lease Issues
When making a real estate investment with existing tenants, it is also critical to examine each of the existing leases. You must review what the lease expiration date in each case is and whether a lease renewal option has been provided to the tenants. For instance, you may not want to make a real estate investment where the leases are set to expire shortly, and vacancy rates may increase in the near future.
In some cases, the existing lease may have a “lease to own” clause, which gives the current tenant an option to purchase the property. Depending on your investment plans, you may or may not want to buy a property that contains such lease terms.
4. Lead Paint Compliance
Multi-family investors should be cognizant of the lead paint compliance of the property they are planning to purchase. You should be aware that almost any building constructed before 1978 would have used lead paint. According to the current laws, if the property has lead paint, children below the age of six cannot occupy that property as tenants.
If you make a multi-family real estate investment and discover later that the property has lead paint and an existing tenant has children who are less than six years old, you will end up in conflict with the law. Even if you notify the tenant and de-lead the property in retrospect, you could still be held liable for any potential health damage that a child may have already suffered by the time you discovered the mistake and took corrective measures.
5. ADA Compliance
Real estate investors often mistakenly assume that provisions of the Americans with Disabilities Act (ADA) only apply to public properties. But in reality, certain aspects of your multi-family property investment may have to comply with the ADA regulations. These may include:
Parking Area – Van accessible parking spots may have to be provided as per ADA requirements, if you plan to set up a leasing office on the site. There are specific size and signage requirements for these spots.
Community Area – If your multi-family offers a community room or another area of public accommodation, ADA compliance will come into play. Failure to comply with the ADA guidelines will attract a significant liability.
6. Permit Data
Permit data from municipalities, counties, and towns is now more accessible than before to bring more transparency in real estate investment. While an online search may help you discover the physical history of a multi-family property, a visit to the local government office can prove more useful as part of your due diligence exercise.
For example, you may be able to find when a new roof was installed, or a furnace installation was completed. This type of data might provide you valuable insights into the intent of the seller and their fairness when these issues come up for discussion at the negotiation table. Sometimes serious discrepancies can be uncovered through these efforts, which can save you from post-purchase regrets.
Final Word
Multi-family real estate investment can prove to be a strong long-term wealth creator for you. But transactional risks are inherent to these are complex investments, which can only be eliminated with thorough due diligence. The best approach may be to work with a trusted professional with experience in dealing with multi-family properties.
