Due diligence!!! Where to start? Where to end?

Question

Ok, here is the deal. I am looking at investing in my first income property, three multi buildings and possibly a single family if possible.

My dilemma is due diligence. Where to start, and how do I know I have have checked into everything there is to check?

So far I have ran numbers like the pod cast have shown, (didn't use the bigger pockets calculatetor). I have done the 50%, 2%, and the 1%, but with the numbers realtor has, which I hear are not good to use, and some say it's ok to use Soooo Blah I'm stuck. So what dose your due diligence check sheets look like?

Theo Hicks · Answer

High level

1. Get your hands on the historical financials (T-12, trailing 12-month profit and loss) and a current rent roll

2. Determine how the property is currently operating (income and expenses from the T-12 and rent roll)

3. Determine how the property will operate once you've taken over and implemented your improvements (new rents and new expenses - a local property management company or local owner you meet at a meetup group can help with this)

4. Determine how much it will cost to implement your improvements

5. With all of the information above, you should be able to create a pro forma (i.e., yearly income and expense projections) to to determine if the deal makes sense

Bjorn Ahlblad · Answer

@Mercedes D carmouche Welcome to BP! I do not have a list written out; but my process increases in accuracy as I work down the layers. I only invest within one hour of where we live so the circumstances will vary from most. I accept that the numbers in a Broker's sheet or listing are typically wrong, out of date, or non inclusive of vacancy, capex etc. I look for the 1% guide line and also do a check on where that might be based on future rents after rehab. I want to change the utilization of a given building and thus look for opportunities based on a somewhat distressed property.

The 50% rule is way more accurate (for now) than anything in a listing or brokers pro forma-Latin BTW for what comes out of the south end of a northbound cow.

If it passes this approximation I will drive out for a look, walk the neighborhood-with my dog, look over the parking lot for the building. Is it full of cars? If so, tenants on rent subsidies; usually I will bump into a tenant and tell them I am looking for an apartment. If it passes this test I get a hold of my agent and we work it further, at this point I am prepared to make an offer contingent on inspection of property and financials. In our area you won't get to see the place without making an offer including EM. Once I have the paperwork I delve into all the details and a more thorough due diligence takes place.

If you key in 'due diligence' into the search area up top a lot of prior threads will come up with check lists and so on.

Make sure you know what your goals are and stick to them to end up with an investment that helps you get to where you are wanting to go. All the best!

Todd Dexheimer · Answer

It sounds like you're still in the analysis phase. For checking on the numbers, use rental comparables in the area. You can use rentometer.com, craigslist, apartments.com, zillow, or get a costar report from the broker. Make sure they are comparable units.

For expenses - this is a bit trickier, but leaning on your 3rd party property manager can help. Also, getting to know general rules of thumbs for the market is good. Knowing that $400/unit/month is average for repair and maintenance and $350/unit/month for unit turnover can help you get to the numbers.

Understand what "fixed" expenses will change. Property taxes typically go up at the time of sale, but understanding the tax rate is important.

Mercedes D carmouche · Answer

Thanks Theo!! I will be combining all the info I received here. Almost ready :)

Mercedes D carmouche · Answer

@ Greg Scully we are working on finances today. Which we really shouldn't have a problem with, but I guess you never know until you know. Would the "Tax Assessor" site be a good tax data base? Because thats how I got my tax info on this place.

Greg Scully · Answer

@Mercedes D carmouche - If you're still early in due diligence, I would recommend working on the financial side first.  Get quotes specific to the property and worry less about "rule of thumb".  Your expenses will be real dollars that have no correlation to the income of the property.

If you're financing it, get multiple lenders involved.  The right financing can make a mediocre deal a lot more appealing.  Same with insurance, get multiple quotes and make sure your comparing "apples to apples" when choosing your carrier.  Property tax can also be an outlier, get in touch with the county/city to make sure your estimating your future tax obligation correctly.Get it professionally inspected.  It's usually not a large expense, and it can give you a great head start on what work needs to be done.

Mercedes D carmouche · Answer

Thanks for the info! My head is spinning with so much information on all the different points in the process.

I kinda feel like this one is ment to be I dreamed of these units for years, then here they pop up, the numbers are looking good, and the immediate area is growing. so im getting off the couch for my first deal!!! Hopefully the financials don't throw everything off.

Due diligence!!! Where to start? Where to end?

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