The due diligence process is the time to ensure that rents are as advertised and the potential for rent growth is as expected. Not doing so sufficiently can lead to the following problems:
- Having higher than anticipated unpaid rents
- Not receiving the rent values expected on day one
- Not achieving the anticipated rent growth
- Devastating performance against the business plan
Each of these problems is easily mitigated through thorough due diligence.
During the underwriting stage, we take the time to review the following:
Rent Roll: tells us how each of the residents rent responsibilities, terms of lease and lease end date.
Trailing 12-months (T12): financial document that outlines potential gross income (PGI), vacancy and operating expenses. Reviewing this document is the first disclosure of the potential gross income, how much rent away actually corrected.
Collected Rents: During the due diligence stage, we will to dive deeper into the financials to ensure that rent is as advertised, understanding the contract rents as well as the amount that goes uncollected.
Rent Projections: Just as importantly, it is essential to validate rent growth projections. If the average rent is $725 per unit, and the broker tells us that we can easily raise rents to $850, it would be careless to simply accept that as truth. We have to validate projected rents by assessing rents in the market for similar housing, paying especially close attention to age of apartment, unit size, square footage, amenities and other important characteristics that influence price.
Validating market rents with the help of a trusted property manager expert in the area can give anyone the confidence of the upside to the investment opportunity. It is critical to go the extra mile to ensure that the business execution goes as closely to the plan as possible, helping ensure the anticipated returns for our partners and improvement to the communities we serve.
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Rodney Robinson II