FUNDAMENTALS
DILIGENCE
Vetting Deals A DUE DILIGENCE CHECKLIST TO INVEST WITH CONFIDENCE
by Ellis Hammond
he public market provides liquidity, but the private market builds wealth. There is a lot of truth in this
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statement. Alternative assets, like real estate, have been a pillar to the wealth creation process for millions of Americans over the last century. The problem, however, for many investors is that there are fewer regulations and more oversight in the private market so the need for greater personal due diligence is required. Here is an easy due diligence checklist to use when vet- ting deals so you can invest with greater confidence and keep putting more and more money in your pocket. KEYAREA#1: THE SPONSOR The best real estate deal in the country can quickly turn into a bad deal if you are dealing with an incompetent or shady operator. That is why my first area of due diligence begins at the sponsorship level, or the person(s) putting together and managing the deal.
Here are a few red-flag questions you might ask during this phase:
• Is there an increase in population and job growth year over year for the last five years? • Does one sector of the job market control more than 25 percent of the employment market? • What is the crime rate in the area? • What is the median income of the surround- ing area? Will the tenant base be able to af- ford the services this property provides? KEYAREA#3: PROPERTY SPECIFIC So now that the sponsor and market check out, it’s time to move onto the deal. Based on your risk tolerance, cashflow needs, and return expectations, the answers to these questions could green or red light the deal. It’s important to assess first what you need your money to do for you! Only then, can you really assess if this is the perfect deal for you. Here are a few red-flag questions you might ask during this phase: • When was the last time the roof, plumb- ing, and electrical were replaced? • What percentage of the cap-x budget is go- ing to renovations directly tied to rent yield? • How does the property compare to its competitors? • What is the class of this property? Does it serve a more affluent or lower income tenant base?
Here are a few red-flag questions you might ask during this phase:
• What does their reporting look like? • Can they pass a background check? • Will current management stay in place and if so, what is their capacity to take on new units? • What does your gut tell you about this person or persons? KEYAREA#2: THE MARKET “A rising tide lifts all shifts.” The tide in real estate is the appreciation and growth or lack thereof of your mar- ket. A decent deal can become a great deal if you buy in a great market. The opposite can also become a reality. It’s important to not just understand what’s happening at the macro level, but also to focus on what’s happening one, three, and even five miles around your property. Just like in your hometown, one street can make all the difference.
26 | think realty magazine :: june 2021
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