| When you take a property under Contract, you know | | | | and Loss Statements and as many Rent Rolls as you |
| very little about its specifics. You might have a Financial | | | | can get your hands on. |
| Statement and a Rent Roll in your hands ... and maybe | | | | - Sit down with your property manager and build a |
| you have done a drive by inspection. But this is only | | | | detailed expense projection based on their experience |
| enough information to make a minimally intelligent offer. | | | | in this market. |
| You must understand a whole lot more about the | | | | - Plug your income/vacancy/expected rent estimates |
| property to know its real value. | | | | in from your market Due Diligence step above. |
| That's what Due Diligence is for. | | | | - Get estimates of loan costs and projected payments |
| A thorough Due Diligence process remove risk from | | | | from your mortgage broker. |
| your investment. You get thirty days to learn enough | | | | - Create your Investor's Proforma for 3-5 years out. |
| to understand exactly what you're getting into, and | | | | Question: What will it take for you to hit your ROI |
| exactly what it will take - under YOUR management - | | | | numbers at this price? Is this even possible? If yes, go |
| to make a profit. | | | | on to: |
| We always advise our mentor clients to use a specific | | | | Step #3: |
| Four-Part Due Diligence Process because we have | | | | Tenant Due Diligence: |
| found there are four ways Risk can damage your | | | | (this is especially important in Industrial, Office and Retail |
| returns. | | | | Properties). |
| - Market Risk | | | | - What is the strength of your current tenants and their |
| - Financial Risk | | | | existing leases? |
| - Tenant Risk | | | | - You will need to do a thorough analysis of your |
| - Physical Risk | | | | tenet's underlying business strength. |
| These four Risk threats interlock like pieces in a | | | | - This gives you an estimate of their ability to continue |
| puzzle. Our four-part Due Diligence process ensures | | | | to pay you rent. |
| that you look at each property puzzle from the four | | | | - Perform a complete analysis of existing Leases with |
| different angles. | | | | Estoppel Letters to verify the contents of the Leases. |
| And the order is Very Important. As you do each | | | | Question: Are the Leases - and the businesses behind |
| separate step of our Do the Diligence process your | | | | them - solid enough and safe enough to continue? |
| property must pass the current step to go onto the | | | | If so, go on to: |
| next one. | | | | Step #4: |
| Example: If you discover the market risks are too high, | | | | Physical Due Diligence: |
| it really doesn't matter what the financial proforma | | | | - Perform a walk-through of every unit and every |
| says or what the property's physical inspection | | | | square foot of the building(s). |
| reveals. The market will sink that investment, so stop | | | | - Create an estimate of all repairs needed and costs |
| the process right there and go ask for your earnest | | | | associated with those repairs. |
| money back. | | | | - What amount of money, time and effort will it take to |
| Here are the Four Parts in more detail: | | | | put the Property in the condition that allows you to hit |
| Step #1: | | | | your Rent and Occupancy numbers? |
| Market Due Diligence: | | | | Question: Will you be able to hit your ROI numbers with |
| Check your assumptions about the market in which | | | | these repair expenses included in your Proforma?. |
| the property is located. | | | | NOTE: Physical Due Diligence is always saved until last |
| - What are the population and job growth projections? | | | | for one simple reason. |
| - What are the market rents and occupancies for | | | | It doesn't matter what the building looks like if it can't |
| similar properties? | | | | pass the first three steps of Due Diligence. A great |
| - What are rent growth projections? | | | | looking building in a lousy market, or one that doesn't |
| - What phase of the market cycle is this market in? | | | | reach your ROI hurdles, or one that has unsafe |
| - What amount of new construction in your asset type | | | | short-term leases is still a bad investment ... no matter |
| is in the pipeline? | | | | how pretty it is when you drive by. |
| Question: Do you want to own Property in this | | | | When you approach your Due Diligence process using |
| Market? If yes, go on to: | | | | these four steps - in this order - you will have a clear |
| Step #2: | | | | understanding of the property's current state AND |
| Financial Due Diligence: | | | | exactly what you will need to do to make it a |
| - Request at least three years worth of monthly Profit | | | | profitable investment. |