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Do Your Diligence – Find the Profits from Commercial Real Estate

Due Diligence is the process of looking closely at the details of a potential investment, to verify material facts, and to assess the property’s investment potential. While there are numerous factors involved, due diligence is the foundation upon which successful and profitable commercial real estate investing is built.

Anything worth doing is worth doing as well as it can be done, especially when hundreds of thousands, if not millions of dollars are involved. Your ability to separate fact from fiction determines your return on investment.

Keep in mind that due diligence is MUCH more than just looking at the numbers. Let’s use a commercial apartment property as an example. There are actually four critical areas that determine the value of a multifamily investment.

Financial analysis

Market analysis

Tenant Analysis

Property Analysis

For the sake of this article, we will not go into an analysis of these four key areas, but rather focus on eradicating the hidden benefit discovered when we do our Diligence on the four key areas with the following goals in mind:

The REALITY of a Return on Investment based on our trademark Do the Diligence analysis.

The independent value of the property in the market.

Current income-producing property features versus hidden earnings features we uncover.

The final price we are willing to pay based on our Do the Diligence analysis. Keep these goals in mind to determine your real return on investment.

Maintain a disciplined, objective approach when reviewing the financial information provided by the seller. The evaluation of your financial statements should uncover concrete benefits in revenues, costs, and profits, and ultimately, cash flow. Simultaneously, your analysis not only verifies reported numbers and assumptions, but must also determine actual value as an independent investment income producer. Most of the price you offer reflects the property’s ability to produce income here and now, not how it might be once you’ve made value-added improvements. Never buy a property on Proforma income projections.

Determining the true value of an investment is an acquired skill that improves with experience. A seller will present the property’s paper assets much more attractively than they really are. That is his job. Your job is to discover accounting tricks to reveal real numbers. Here are some common examples of financial disrepute:

Distorted lease rent payments. A building can be occupied by tenants who have been allowed to pay late or not at all, without contingencies that are immediately carried out through soft management.

Overly optimistic projections of expected returns. A property could advertise its proximity to the market with an area that has a higher return on investment than it is currently experiencing.

Disguise the cost centers that hide the real image. Marketing, maintenance, management expenses that are actually excessive for the property or misallocated to the market

Treat recurring items as extraordinary costs to remove them from the profit and loss statement. Inflated or delayed maintenance fees disguised as one-time costs.

Not disclosing capital expenditures or general and administrative costs in the periods leading up to a sale to inflate cash flow. For example, a property may decide to postpone its on-site laundry contract renewals so that those new figures are not immediately visible on the books, misleading the investor about contract renegotiation and increased costs.

A careful examination of the historical and prospective cash flows reveals the actual and independent value of the proposed acquisition. Look beyond the reported numbers and rely on your team’s on-site visit when doing your due diligence to verify costs versus reported revenues.

Getting to real numbers usually requires the close cooperation of the seller. Any contradictory position on the part of the seller is almost always a signal to dig deeper.

Of course, no matter how deep you dig, many facts it can remain hidden if you don’t know where to look or how to find hidden earning potential. Discovering as many discrepancies in represented value versus stand-alone value will improve your position when you bid and is crucial to your acquisition and return on investment.

A complete Do the Diligence analysis system is available from Investor Tours University.

Learn more from a proven investor education resource:

Investor Tours University is a dedicated resource that helps investors build wealth and reach their defined level of success. We offer state-of-the-art commercial real estate investment education designed to meet the needs of investors with diverse backgrounds and experience levels. Our faculty consists of a network of national experts in legal, tax, investment strategy, property management, acquisition, and sales professionals who practice what they teach investors, which is how to achieve generational wealth using commercial real estate.

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