How to conduct Due diligence?

[Abou C.]

As first time investor how does one conduct effective due diligence and cover ones basis?. 

What material should be asked or checked and verified?.

[Mike B.]

@Abou C. I would break due diligence down into three categories:

1. Market - Know the neighborhood, local economy, bus routes, who lives in this neighborhood and why and where do they work? Check the competitors thoroughly and make sure you know what the prevailing market rents are and what amenities that includes. Check the comps for who pays what utilities and pet policies.

2. Financial - copies of P&Ls along with their corresponding tax returns/bank deposits to prove them, a current rent roll (and depending on the size) estoppel letters from the tenants confirming lease charges are what is represented in the rent roll, a thorough lease audit of all tenants to include the screening they underwent before being handed keys, last 3-5 years of insurance loss runs from the owners carrier, and understanding the property tax assessment and how a sale might change the current charges.

3. Physical - A thorough inspection of the site, inside and out of all units and grounds. This includes all appliances, mechanicals, and systems. Check with the building and zoning department for open permits and permit history to see if any improvements you find to the property were properly done. Check with the Police and Fire Marshall for call history and past inspections. Check any and all easements you might find on the survey. Check the lighting at night and the grounds/roofs after a good rain if possible.

While this is not an exhaustive list, it is a pretty good start. Experience is something you never stop acquiring, and I still learn something on each deal I have been a part of that I could have done better. And of course, I would do NONE of this without first having an accepted LOI and signed Purchase and Sale Agreement. In fact, your PSA should spell out how a lot of these items will be conducted.