PROPERTY ACQUISITION - DUE DILIGENCE

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Main Components to Analyze

Rent Roll

Financials

Building Information

Market Survey

Rent Roll AnalysisTo start rent roll analysis an analyst have to first get and authenticate under listed documents. This is very important to make sure everything which property financials are showing is true and trustworthy.

• Tenant Leases: proper documentation, longer duration, term of leases, regular renewal & rent revision• Rent Roll vs Income Statement: cross check difference in rent roll & income

statement• Certified Rent Roll: Rent Roll declaration submitted with government

organization (if any)

• Document Authentication: Thoroughly check following things to certify authenticity of rent roll as provided by existing owner/ investor

• Total number of Units• Type of Units• Area covered by every unit• Complete tenant information• Monthly contracted unit rent• Monthly ancillary income stated in lease• Value of cash concessions & reason• Value of subsidy• Utilities included in rent Yes/ No• Delinquencies

Financials - Key things to Analyze• Collected Rental Revenue• Net Operating Income• Property Management Firm

Collected Rental Revenue: We have to compare historic data and make trend to get accurate picture of collected revenue. This analysis should include following things:

• Revenue Growth Metrics• Rent Growth Metrics• Revenue – Ancillary Income

Revenue Growth Analytical Metrics: Revenue is combination of all income generated through

property and related services i.e. rents, late fees, parking, garage and every source of other income.

In every property main source of revenue is rental income and if revenue is increasing year-over-

year then it should be cross checked whether it is due to rental increase or other source of income.

Below metrics can be helpful in determining percentage change in revenue.

Revenue per square foot (gross)Revenue per square foot (rentable)Annual revenue per unitAnnual revenue per occupied unit

Rent Growth Analytical Metrics: Rent growth is different than rental increases because rent growth

occurs when you upgrade property according to modern amenities and facilities to compete in market and

rental increase are periodic positive change in rent amount. A scope in rent growth can be measured by

difference in between GPR and Rent charged to tenant. It is only justifiable when gap in between GPR and

Rent charged is high, also proportion of rental growth should be higher than amount of investment to

upgrade the property. Following metrics will always be helpful to check future growth of rent which is always

key requirement behind any investment. These metrics have significant value for analysis when there are

multiple years of data. By analyzing data with following metrics we can build and compare direction of trends.

Rent per square foot - Gross Rent per square foot – Net Rentable Annual rent per unit Annual rent per occupied unit Average length of tenancy

Revenue – Ancillary Income: It is important to know that property managers efficiently generating

revenue from other source of income. It is always more profitable and comfortable than rental rate increase

because investment in these services are much lower than makeover of complete rental unit. The more

impressively property management firm can sell as menu of services to the residents more efficient they

prove themselves towards managing the property. Following are the set of services which property

management should charge or offer as per requirements:

Application Fees Late Fees Break-Up Fees Appliances Pet Fees Laundry Internet and Cable Parking Concierge services

Net Operating Income: One should closely go through Income statement to check trend of

expenses incurred on the property after revenue part. At the end of day investor will get NOI amount in

his account irrespective of amount of revenue. We have to go through below documents in detail to get

accurate authenticated NOI:

Financial Statements – Historical & Current

Actual vs Budgeted expenses – Variance & Explanation

Schedule of Capital Expenditure

All contracts and agreements related to the operation

Historical data of real estate tax & Insurance payments

Aged receivables & payables

Property Management Firm: Every rental property should be managed by professional

property management firm. An expert professional can increase your revenue to optimum extend

because it directly effects charges for his services. The level of property management firm can be judged

in following things:

Leasing or Vacant unit %

Collections

Expert Management Systems

Emergency Response

Vendor relationships

Owner reports

Maintenance staffing

Building InformationWe should check all building related details other than ownership deed, because all related documents

are equally important from an investor point. If an investor missed anything related to below mentioned

things then he would bear heavy losses for the same:

Plans and Reports related to land & building structureAll licenses, permits and approvals for the propertyExisting loan documentsAny legal notices from legal/ government departmentsHistorical & Current capital improvement plans

Market Survey

•Market Competition

• Demographic Survey

Market Competition: In this parameter we have to compare similar properties with same size, locality and amenities for market rent verification. In every property it is important to calculate Gross Potential Rent to set target of income in the future. To get accurate picture of market rent and gross potential rent we have to compare at least following things:

Asking rent Vs Actual rent per square feetComparative amenities (pool, clubhouse, gym)Number of bathrooms per unitStreet level visibility (Car Counts)Covered/ Open parking space Incidents of crimeAge of assetsSimilar unit sizes

To justify above information interview current tenants, local media, on-site & off-site leasing offices, realtors, social media.

Demographic Survey In this parameter we have to compare according to different demographic properties locations

• Census Data: Population data of the location is the first point to measure future prospects of rental growth. Check for Block Group, Census Tract, Metropolitan Statistical Area, primary market, 24-hour cities, secondary market, Tertiary market, Frontier Market while going through censes data.

• Traffic Patterns: If you are looking for commercial property then it’s important to check volume of traffic in the area where property is located. It will help to draw some conclusions and make predictions about future business and growth.

• Building Permits: All the paperwork related to building should be checked. Also check where builders are interesting in taking permits and licenses to build, it clearly indicates that area will be much favorable for future options.

• Chamber of Commerce: Check with chamber of commerce which industry is coming in and going out. It affect badly rental growth of that area.

• FBI Statistics: It wise to know crime trend of particular area where you are interested in buying the property. It is public information and can be easily assessable to everyone.