The Third Rule of Thumb: The Feasibility Study

One of the most important things that you need to do during due diligence is your feasibility study. If your preliminary research has shown you that this is not a good opportunity and you need to walk away, then there is no point in paying for a feasibility study that will just tell you the same thing. On the other hand, if all of your preliminary research indicates that you have a great opportunity, then you want to get a feasibility study to make sure that you aren’t missing anything.

When you write your offer, make sure that you give yourself enough time during your due diligence period that you can have a feasibility study done. This is not just a simple inspection where they come out, walk through the property, check off a few boxes and say you’re done. This is an in depth study that your lenders and your partners are going to rely on to determine if they want to invest in your project.

The feasibility study gives you a third party perspective of the property. They have no emotional attachment to the property and so they can evaluate the property from a third person perspective. This helps you to know if this is really a project that you want to move ahead with. You can take the information from the feasibility study and make an informed decision about the project without letting your emotions cloud your judgment.

The feasibility study will review everything that you have studied about the property and probably some things that you didn’t think to research. They will make sure that you didn’t make any mistakes in your calculations. Potential partners and lenders rely on feasibility studies to make sure that they are investing in good projects.

Because of the cost of a feasibility study, you may want to skip this step. However, this is a crucial step in finding lenders and partners. It is also important to helping prevent you from making a mistake. You don’t want to invest in a dud. A feasibility study helps make sure that you have crossed all your t’s and dotted all your eyes when it comes to the necessary research on the property. A feasibility study will allow you to make an unemotional decision about the project and it may prevent you from investing in a project that isn’t going to be profitable. If you have made a mistake anywhere in your numbers or your inspections, or your projections, they will find it.

The feasibility study is a fresh set of eyes for your project. It provides the pertinent facts that you and your investors need to know to determine if your project is worth your time and effort and capital. They will evaluate the current market to see what the rents will be for your property. This will allow you to determine whether or not your property will cash flow. They will validate everything that you have checked to make sure that you really do have a great project. If you don’t, they will tell you.

Another reason to get a feasibility study is because it will help you with your funding. When you are raising capital from your investors or getting a loan from the bank or even a combination of the two, they are going to want some kind of reassurance that you are on the right track. A feasibility study shows them that you have had third party consultants review and inspect the property to make sure that it is a good opportunity. The feasibility inspectors don’t care whether or not you do the deal, they only care about the validity of the study. As a result, your investors trust them.

A feasibility study is one of the most important reports you will get about your property during your due diligence period. Make sure that you have enough time that you can get the results so that you can make an educated decision before you move forward. As always, happy investing.