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