You Live & Die by Due Diligence

Your Due Diligence period is the most important part of your purchase period. If you don’t do the necessary research, you may end up with a different property than you hoped you were purchasing. Don’t allow excitement to blind you to the reality of the property you are purchasing, make sure you do your due diligence.

Due Diligence is a huge topic. We could review 10 topics and one could say we missed another 50. Because of this, we are going to focus on one of the most important aspects of due diligence, which is your feasibility study.

You are not going to want a study done on every property that you look at. You may not even want one done on everything you get under contract. But you do not want to close a transaction without one. A feasibility study gives you an in depth look at the property you are buying. It will tell you everything from the profitability of the property to the traffic patterns.

Before you spend the money on a feasibility study, do some of your own research. Get a copy of the profit and loss statements as well as the pro forma and the tax returns that back it up. Do the numbers match what they told you? If not, is there still enough cash flow to entice partners to join you in your venture? If not, adjust the price or walk away. You don't need to buy a property that will become your nightmare. You don't want to be the next motivated seller, selling at a loss.

You always need to buy with the end in mind. Are you going to be selling this property in a few years after you have renovated it for an upside potential? If so, you need to purchase the property for the biggest discount that you can get. Are you going to be holding this property for cashflow? If so, you need to make sure that you are getting the maximum cashflow possible.

A feasibility study will help evaluate your market. Is there a possibility of being out located? Is there a chance that another self-storage facility will be built between you and your rental demographic? If so, why would they drive past that facility to get to yours? This could severely affect the long-term profitability of your self-storage facility. You want to start by evaluating how many self-storage facilities are within a 3 mile radius of the property that you are considering purchasing. If there are more units available than the population can support, you may not want to move forward. If things look good, get the study.

Your due diligence also needs to include the condition of the property. How does the property drain? Has the property been well kept or is there a lot of deferred maintenance? Will you be able to turn around the vacancy rates by improving the appearance of the property? If not, how are you going to turn around the cashflow?

What kind of marketing is currently being done on the property? What kind of results is that marketing getting? What changes can you make to improve the marketing so that you can improve the occupancy rates of the self-storage facility?

Any time that you buy a self-storage facility you want to make sure that you do your research on every aspect of the business. A feasibility study can help you take a deeper look at the property. However, you want to do your own preliminary research to make sure that there isn’t an obvious reason to cross this property off your list before you invest in the study. Take the time to do your due diligence properly. As always, happy investing.