How to Do Due Dilgence When Buying an Apartment Complex
Investing in commercial real estate is a popular investment strategy, and the proper due diligence can mean the difference between a property that generates income or losses. This article will walk through the main steps investors in apartment complexes should take in order to safeguard against losses. Ultimately, the goal of due diligence is to create value.
Other People Are Reading
Instructions
-
How to do Due Diligence When Buying an Apartment Complex
-
1
Request the income statement on a monthly, quarterly and annual basis for the past five years. You should be able to discern trends in income and expenses.
-
2
Chart gross rents, operating income and major expenses in a spreadsheet. These are the main drivers of net income and should be researched carefully.
-
-
3
Project future income, time to fill vacancies and maintenance costs. You also will need to know how many units are in the complex and the general condition of these units.
-
4
Create a sensitivity analysis around these variables to determine the effect of raising rents. Request a vacancy report and be sure to review all lease agreements. You will need to know the average life of these agreements as well as expiry.
-
5
Check all units to gauge condition. This will provide a basis for negotiating the price. Make note of each unit that needs repairs and estimate the associated costs.
-
6
Divide the number of units into the asking price. This will provide you with an average cost per unit. Compare this to other complexes as well as the current rental per unit. You are looking for opportunities to create value.
-
1
Tips & Warnings
This is not to be construed as investment advice.
