{"id":107488,"date":"2019-02-13T14:30:38","date_gmt":"2019-02-13T21:30:38","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=107488"},"modified":"2021-03-16T14:52:23","modified_gmt":"2021-03-16T20:52:23","slug":"doing-due-diligence-example-apartment-complex","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/doing-due-diligence-example-apartment-complex","title":{"rendered":"Doing Due Diligence on a 74-Unit Apartment Complex [Real-Life Example!]"},"content":{"rendered":"

In my previously published “Ultimate Guide to Due Diligence<\/a>,” I wrote in depth about the ins and outs of this critically important element of real estate investing. To provide further insight, I thought it would be helpful to walk you through it, illustrating the process with an example property.<\/p>\n

Performing due diligence can be broken down into several distinct stages, which I recommend tracking using a checklist.\u00a0(And for any who doubt how important checklists can be, please read Atul Gawande’s great book The Checklist Manifesto: How to Get Things Right<\/em><\/a> immediately).<\/p>\n

My real estate due diligence checklist looks like this:<\/p>\n

    \n
  1. Pre-Offer Due Diligence\n
      \n
    1. Area Analysis<\/li>\n
    2. Value and Financial Estimate<\/li>\n
    3. Rehab Estimate<\/li>\n<\/ol>\n<\/li>\n
    4. Post-Acceptance Due Diligence\n
        \n
      1. Physical Due Diligence<\/li>\n
      2. Financial Due Diligence<\/li>\n
      3. Legal Due Diligence<\/li>\n
      4. Inspections<\/li>\n<\/ol>\n<\/li>\n
      5. Retrading (if necessary)<\/li>\n
      6. Final Decision and Walking Away (if necessary)<\/li>\n<\/ol>\n

        So, let’s walk through each of these steps as I found, evaluated, and (spoiler alert!) backed out of a 74-unit apartment complex in Kansas City, Mo.<\/p>\n

        1. Pre-Offer Due Diligence<\/h2>\n

        My company became aware of this property on a commercial real estate website called Loopnet. This\u00a0is actually rather rare since most good deals have already been swooped up before they hit the site. But this took place back in 2012, and the real estate market was still pretty depressed.<\/p>\n

        The apartment complex was listed for only $1.8 million ($25,000\/door) and had supposedly just been repositioned with its occupancy set to hit 90 percent.<\/p>\n

        We knew the area pretty well. It was mostly comprised of homes purchased by middle-class Americans. The apartments seemed almost out of place.<\/p>\n

        The neighborhood was solid, although it was off the beaten path. This isn’t good for apartments, because you won’t get drive-by traffic to attract prospective tenants.<\/p>\n

        It also lacked a bus line nearby, which isn’t great for lower-end apartments. However, most of the residents appeared to own a vehicle.<\/p>\n

        We then looked online at income and crime statistics. The stats below are from more recent years, but they haven’t changed much compared to what we found in 2012.<\/p>\n

        From city-data.com:<\/p>\n

        \"graph<\/p>\n

        From bestplaces.net:<\/p>\n

        \"violent<\/p>\n

        So, the median household income in this specific area was only a bit less than the statewide average\u2014not bad. The crime was about 50 percent higher. But from our knowledge of the area, we knew that most of that crime was in another part of the zip code.<\/p>\n

        Zip codes can be expansive, so data on them is at times misleading. Crime may be localized in a particular part of that zip code. Fortunately, there are tools available to aid in evaluating neighborhoods.<\/p>\n

        Related:\u00a0<\/strong>An Introductory Guide to Leveraging Mapping Technology in Investing<\/a><\/em><\/p>\n

        We also looked at some nearby comps. However, with apartments, you can’t just do a standard comparable market analysis. There are too many differences between apartment complexes to try to act as if they are the same.<\/p>\n

        That being said, you can first compare the costs of rent to get a handle on similarities, differences, and what you think you’d be able to charge. Searching nearby properties on\u00a0Craigslist or using rentrange.com can help with that, too.<\/p>\n

        More importantly, you can compare complexes based on their cap rate<\/a>. The cap rate is just the net operating income of the property (all income minus expenses not including debt service) divided by the price.<\/p>\n

        This calculation can provide a very simple apples to apples comparison\u2014although it gets messy in practice. (For example, it may be hard to figure out how much other owners spent on rehab at other complexes.)<\/p>\n

        From our research, we found several comparable properties:<\/p>\n