Due diligence 12 unit apartment

[Jeff Bowen]

My wife and I are making an offer this week on a 12 unit apartment. Are there any resources to assist with due diligence? As important as this is, it would seem that a company would offer this as a service to investors. I am just not aware of one other than another investor who has done it before. I am in Okinawa and my wife will be conducting the due diligence. Any guidance would be appreciated. We have single family homes but this will be our first multifamily. 

[Ben Leybovich]

The items you need most serious DD on are:

1. Taxes

2. Insurance

3. Renovation budget

4. Projected repositioned revenue.

I am going to try and open a can of worms here. This might make you feel both better and worse...

If you are buying right, then you are buying value add, meaning you are going to reposition the property. If this is the case, then what is currently in place becomes much less important. What's important is how much money you'll need to accommodate this process, both in terms of renovation costs and in terms of reserves because this process is painful...

As such, yes - you should walk into each apartment to make sure it's not a totally down unit which instead of $12,000 will cost $20,000 to put together. On the other hand, if you were planning on replacing cabinets, tops, flooring, fixtures, and appliances, then there is very little you will find in DD that will change your opinion of the investment.

So, the good news is that while DD is important (specifically financial DD), if you made the right assumptions all you are doing is validating during the DD. That's not scary. The bad news, though, is the intense amount of knowledge required to begin to make the right assumptions in the first place...