When you are looking to purchase a new rental property the list of due diligence (DD for short) items can feel endless. Being that we recently went through this for a new property we are purchasing I thought it would be a great time to list some of the highlights that we look for during the DD period. Remember that DD consists of both financial and physical DD.
During financial DD you want to discover the overall monetary condition of the property. Is it where it should be based on what the broker and seller have told you? Are your collected rents and expenses lining up with the advertised NOI, does the cap rate and your agreed upon purchase price make sense or do you need to adjust?
When performing physical DD you are looking at the property itself, after all this is your asset. You should go to the property and work with a good property inspector, contractors and your management company to get a very clear picture of what the property looks like condition wise.
Below is an augmented list of what we look for. Please know this is not an all encompassing list and there will be additional things that need to be discovered about each and every property. Also set aside plenty of time to complete these tasks as it can take longer than you expect!
Questions to Ask Prior to the Property Visit
- What are the conditions of non renovated units, are they all similar, are some grossly worse
- How many units have been renovated
- What do these renovations include, be specific if there are “classic” and premium” turns
- List of the vacant units and required renovations
- Current condition report of units
Capital Expense (Capex)
- List of all capex completed in last 3 to 5 years along with the cost
- What capex needs to be completed, what is the estimated/quoted cost
- How many HVAC units have been replaced and repaired
- How many water heaters have been replaced
- How many boilers have been replaced
- Condition of the roofs, along with style and material
- Foundation repairs or work
- Plumbing work that has been completed
- What kind of piping is on premises
- Sewer line material - PVC or cast iron (cast iron rots with time)
- Any known major plumbing issues/leaks such as slab leaks
- Electrical work that has been completed
- What kind of wire is on premise - copper or aluminum (AL is a fire hazard and could be a deal killer b/c of lending restrictions and insurance)
- Brand of electrical panels on premise
- Insect problems such as termites, bed bugs or roaches
- List of what the PM thinks needs to be done on site, this can include capex, deferred maintenance, cosmetic issues, etc.
Basic Costs for Turning Units
This is based on a C class asset in reasonable shape
Classic Turn, Cost approximately $3,000
- These units have little deferred maintenance
- Essentially just cleaning the unit for releasing
- Deep cleaning of unit
- Clean or replace carpet
- Paint
- Consider new cabinet hardware and door knobs
Classic Turn Plus, Cost approximately $6,000
- Needs some renovating based on deferred maintenance
- Everything done in the classic turn
- Replace carpet with LVP
- Reface cabinets
- New mirrors
Premium Turn, Cost approximately $8,000 - $10,000
- Much, if not all of the unit needs updating
- Everything done in the classic plus
- Reface or replace cabinets
- Replace counter top
- New bathroom vanity(ies)
- Reglaze bathtub
- New matching appliances
- Lighting package
- Plumbing fixture package
What to Look for During the Property Tour
Exterior
Landscaping
- Overall curb appeal
- Landscaping and beds
- Overgrown trees and bushes
- Dead trees, bushes, etc
- Areas that need mulch, grass, sod or rocks
- Property signage
Property Walls
- Material and condition
Pictures of buildings
- Building number
- Each side of the building, go CW
- Any common spaces, halls, niches, etc
Windows
- Condition
- Double or single pane
- Frame material - Vinyl, wood, etc
- Should solar screens be added
Roof
- Type - Pitched or flat
- Condition, material and age
Foundation
- Look for cracks and separation
- Look around, doors, windows, crawlspace entries
Parking Lots and Sidewalks
- Condition
- Does it need patching, seal coating, striping, etc
- Rough square footage of area in need of work
Fences, Gates, Dumpster Surround
- Condition
- Does anything need paint, stain, repair or replacement
Security Cameras
- Are there cameras, if so do they work
- Should cameras be added
Lighting
- How well lit is the property at night
Interior
Tour each unit if possible
- Tour classic, premium and original units
Plumbing
- Check material of clean outs - PVC or Cast Iron
- Boilers
- Pictures of units and labels
- Look for any leaks or signs of leaks
HVAC
- See all units
- Pictures of units and labels
- How many will need replacing soon
Flooring
- Material
- Overall condition
Paint
- Condition and color of walls, ceiling, doors and trim
Kitchen
- Appliances
- Cabinets
- Countertop
Bathrooms
- Shower condition
- Vanity condition
- Is there an exhaust fan
- How many GPF (gallons per flush) is the toilet
Amenities
- What is there - gym, pool, picnic area, dog run, theater, etc
- Condition
- Do any need to be added