Real Estate Due Diligence: 7 Steps You Need To Follow

September 10, 2020 – Real Estate Investing

Whether you’re acquiring, selling, or leasing real estate, doing your due diligence on important metrics is one of the first things you should tackle. Many people think they can pay a real estate brokerage firm to take it out of their hands, but nothing beats knowing the real value of a property, along with its charms and challenges, yourself.

Here are 7 steps you must take when performing your due diligence on a property.

Step One: Verify the Numbers on a Lease

When you go to a brokerage firm to lease a property, they will give you what’s called a “rent roll,” which is a list of a landlord’s holdings and the amount of rent that tenants pay. Like all financial products, you have to verify these numbers yourself to avoid losing cash. The verification process on a rent roll is called a “lease audit,” which can be fun if you’re a detail-oriented person.

Look over the complete file for each tenant, taking note of their lease terms, rent, and names. If you’re renting more than one unit or building, jot down the number of tenants, concessions, lease renewals, and whether rents and fees have had some delinquencies. If some tenants have pets or some vehicles, look at the extra charges they’re paying for cleaning, garages, and parking spots.

This verification will give you a more accurate snapshot of the community, which you can then compare to the numbers on the rent roll to eliminate any discrepancies.

Step Two: Inspect the Site

Physically checking the apartment building you’re about to lease might be a little time consuming, but that’s where you’ll find out if you have to prepare more capital for maintenance and repairs.

Leaking roofs, cracked pavements, and decaying sidings and wall panels can cost a lot of money to replace. Ask for an estimate before you physically visit the site to see if the broker’s estimation of its value is accurate.

Remember that red flags and opportunities aren’t just inside the building. Wander outside and look out for possible sites for a playground, exterior amenities, and spaces where you can create common areas to maximize the property’s value.

Step Three: Inspect Your Unit

A brochure from your broker will feature the areas of an apartment building that are the easiest on the eyes, typically photographed with perfect lighting and lightly edited colors.

You have to physically enter each unit that you’ll be leasing and inspect if they are as advertised. This inspection will tip you off to hidden destruction or unclean areas, which could be a source of roaches, bed bugs, and mold.

Step Four: Inspect the Inner Workings

This step is known as a specialty inspection because you need to hire a reliable specialist or general contractor to thoroughly inspect the inner workings of a unit or the building.

If you find any warning signs as you walk through the property, ask the contractor to inspect it for you. HVAC systems, roofs, foundations, and swimming pools are some of the things you should prioritize because they can cost a lot of money to fix. Finding problems in the expensive parts of a building will put you in a powerful position to negotiate for a lower price if the seller doesn’t agree to make repairs.

Step 5: Look at Your Submarket

If you’re buying or leasing a mixed-use or commercial property, the life of your investment will depend on its immediate submarkets. Is it close to a competent school? Is it in a good part of town, with easy access to malls, supermarkets, and freeways?

High vacancy rates on surrounding properties could mean that your property might not rent well, and high occupancy rates could mean that you can charge higher rents. Make sure to research the homeownership rates and the absorption rates of your prospective commercial property.

Step 6: How Much Rent Do Your Neighbors Charge?

Knowing the average rent of nearby properties is essential to making a feasible capital plan. If you’re purchasing a property that looks slightly dated, you will be able to charge higher rents after some renovation.

Make some connections and research how much your competition is making in your property’s part of town and whether people are willing to pay more for a renovated unit.

Step 7: Know When to Call a Professional

Whether you’re doing your due diligence for a business opportunity or your future home, you need to have all the bases covered. Call Yankee Capital today at (781) 400-8778 for peace of mind.

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