Due diligence is absolutely critical and if we end up working together, you will see that we spend a lot of time conducting our due diligence. One of the first questions that comes up is, how do you value a property? A lot depends on sales comps, talking to people who are experts in that area and doing your own home work.
If you are taking over a property that has tenants in place, you need to go over the leases. These will be provided to you by the owner. Don’t assume that just because there are tenants in place that it will continue to be the case. A lot depends on the quality of the property, which will determine the type of tenants you have.
You can’t trust the seller and what they say about the property. Remember, the seller just wants to get rid of the property at the maximum possible price. If you are just getting started in the industry, you need to be very careful. This is why an experienced partner or mentor is very handy because they can prevent you from making fatal mistakes. Sure, you learn a lot from mistakes, but a fatal mistake can kill time and cash, both of which are precious.
Underestimating closing costs is another mistake rookies often make. Let’s say you are buying a $5,000,000 building, it’s easy to assume that you need just 25-30% “down”. In commercial real estate, closing costs can add a couple of points to that. Of course it depends on the price of the property, the more expensive the building, the lower the ratio of building price to closing costs. Some of the costs you will encounter relate to the financing aspect, such as loan origination fee, loan guarantee fee, etc. These will be covered later.
If you are purchasing a large 500 unit building, it’s important for your team and you to walk through each unit. Sure, the inspector and his team will be the one doing most of their work, but you need to walk with them. My partners who run syndicates don’t themselves walk through each unit since they have employees who do it for them, but they do nevertheless have eyes and ears on the ground during the due diligence phase.
You also need to be very familiar with what the competition is doing. You need to be well aware of what properties like yours are renting for. You need to know what concessions are offered to tenants. It’s easy to figure these things out. Either you can drive around your property and look at comparable apartment buildings, call them and ask them about their rates and concessions as a secret tenant. Or, you can do a reverse Google Search for your property to find where the property is listed for rent. Owners and property managers often times list the property for rent on various listing sites. You can find them and see what they charge.
Don’t underestimate the work that needs to be done. It’s easy to get swayed by success stories or from people who make it sound easy. If it were easy, everyone would be doing it. It takes vision, persistence and lot’s of learning to be successful.