Due Diligence

I want to share my knowledge to underwrite a real estate deal—especially for multifamily acquisitions.

The due diligence process is a comprehensive and systematic investigation and analysis to evaluate the property's financial, legal, physical, and environmental aspects before making a decision to purchase.

The process typically involves reviewing property documents, leases, financial statements, property condition reports, and environmental reports, as well as conducting site inspections, zoning reviews, and title searches. The goal of due diligence is to identify any potential risks or liabilities associated with the property, assess the accuracy of the seller's representations, and ultimately make an informed decision.

You might have a chance to get a flyer or offering memorandum from listing agents. Please don't get fooled by the seller's idea before doing homework.

There are four forces that drive property value: Economic, Social, Governmental, and Physical/Environmental

My method crosses over these forces and the analysis of the property itself.

1. Profitability Test

2. Market Research (Details will be posted soon)

3. Property Analysis

1. Profitability Study

   1. Make sure the deal makes sense. Run a simple model including current operation and assumed debt terms. Assume as conservative as possible, and make sure cash-on-cash (CoC) stays positive.

   2. If the CoC doesn't work, stop wasting time on it

2. Market Research (Details will be posted soon)

1. Demand

   1. Location + Market Boundary

   2. Leading Industry + Major Employer

   3. Population Growth

   4. Household Structure

   5. Household Income Trend

2. Supply

   1. New Construction Pipeline

   2. Sales/Rent Comps

3. Property Analysis

1. Financial/Operational

   1. Rent

   2. Occupancy Rate

   3. Operating Expenses

      1. Utilities

      2. Maintenance

      3. Property Management Fee

      4. Property Tax After Purchase

   4. Expected Capital Expenditure

   5. Debt Assumption

2. Physical

   1. General Conditions

   2. Deferred Maintenance

   3. Exterior Wall

   4. Roof: Installed/Replaced Year

   5. Sewer Line: Scope it

   6. Heating System: Manufactured/Repaired Year

3. Legal

   1. Zoning

   2. Rent Control/Eviction Moratorium