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5 Elements Define Rental Investors Due Diligence | International Residential Real Estate Investors Association
Wednesday November 22nd 2017

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5 Elements Define Rental Investors Due Diligence

I continue working on a new book for due diligence.  Supporting this, I have explored many different ways of presenting the information.  The following article which I recently offered on EzineArticles provides simple way to analyze the process.  I’ll be interested in any comments that we receive on this.

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Identifying the right project, paying the right price, understanding what the project needs, knowing how to manage the project, and achieving the right exit is always the key issue for investors.  Working out these areas are  the keys to great project due diligence.  The due diligence actions seek to answer these questions in one fashion or another.  Because due diligence seeks to answer these questions, relying on bank required documents as the core of due diligence fails investors because the bank’s focus is on value which relates to the right price, but may fail every other point the investor plan addresses.  Effective investor due diligence assumes an entirely different character answering the 5 points introduced – project type, price, need, management plan, and exit.

Element #1 – Project Type

Project type requires analyzing the project, the submarket, the resident base, and any other issues the investor considers a component identifying or describing their desired target project.  Project issues  include age of the property, traffic visibility and volume, floor plans, resident demographics, surrounding area  neighborhood, shopping, and entertainment.  The  variety of project type issues derives from investor project selection criteria.  The degree with which projects fit the criteria determines whether they meet investor expectations and goals or not.

Element #2 – The Right Price

The right price may be effected by issues other than the appraisal and actual cash flow.  However, conservative investors place actual project value high on their list of selection drivers.

Element #3 – Project Needs

Knowing the needs of a project drive capital requirements, renovation plans, management and maintenance staff plans, and provide a core element of the business pro forma.  Project needs are  a function of historical performance, repositioning goals, and long term investor return considerations.

Element #4 – Management Plan and Requirements

Understanding and delivering  on management  needs of a project derive from current project condition, the neighborhood, size of the project, amenities, service plans, renovation expectations, and many other factors.  Developing  a management plan can determine the success or failure of the rental project.

Element #5 – Exit Plan

Project plans call for varying hold periods and in some cases investors expect to keep a project for generations.  Nevertheless, at purchase, smart investors consider the exit for a project.  The major risk of failing to consider  exist is stranded capital.  A project can offer outstanding long term cash flow and income yet not be saleable.  For example a project might offer a strong day to day profit success serving a remote employment center, but by virtue  of the remote location prove difficult or impossible to sell.

Wise investors consider the elements of due diligence in total because the global perspective offers the best path to realizing income, asset value, and capital return goals and the lowest risk approach to projects.

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I am still considering whether the order should be different and I am working on the chapters these elements will include.  My present plan is that each element will be a “Part” of the book.  Each “Part” will have a number of chapters.  Each chapter will include sections.  The plan is to include tables, guides, and samples of the information.

Also, I intent to seek some support compiling the  information from other industry expert  sources as I go along.  The objective is to finish this book by the end of the year.

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14 Responses to “5 Elements Define Rental Investors Due Diligence”

  1. Anna Bass says:

    This is an interesting topic. I’m always looking for valuable resources to share with clients and the accounting community, and your article is without a doubt worth sharing!

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  9. I would like to thank you for the endeavors you have made in publishing these articles. I am a new real estate agent and I’m trying to broaden my knowledge of real estate topics. I think I’ll be coming back to your website for quite awhile :)

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